Cash Basis for Sole Traders and Partnership Accounts
Cash basis is a method to work the income and expenses for your Self Assessment tax return, if you fall within the category of a sole trader or partner.
Benefits of using cash basis
If you own a small business, the cash basis method may be better than traditional accounting.
The advantage is that you only need to account for money when it comes in and out of your business. You will not have to pay income tax at the end of the tax year on money that you have not received in the period.
Sometimes cash basis may not suit your business
Cash basis most likely won’t suit you if you:
- wish to claim bank charges or interest more than £500 as an expense
- if your business is more complex, eg you hold high levels of stock
- If you need accounts to finance your business. e.g- a bank may ask see accounts that use
- traditional accounting
- If you have losses that you wish to offset against other taxable
Who can use cash basis?
You can use cash basis if you:
- are earning up to £82,000 a year
- run a small self-employed business, e.g. sole trader or partnership
You must use cash basis for all your businesses, if you have more than one. The combined turnover from your businesses must be £82,000 or less.
If you use cash basis and your business grows during the tax year
Anything above £164,000, you’ll need to use traditional accounting for your next tax return. You can stay in the scheme up to the total of £164,000 business income.
Who can’t use the scheme?
Limited companies and limited liability partnerships can’t use cash basis.
The other specific types of businesses that can’t use the scheme are:
- If they are Lloyd’s underwriters.
- If they are Cemeteries and crematoria.
- If they are Dealers in securities.
- If they are Ministers of religion.
- If they are Relief for mineral royalties.
- If they are Lease premiums.
- If they are Farming businesses with a current herd basis election.
- If they are Farming and creative businesses with a section 221 ITTOIA profit averaging election.
- If they have claimed business premises renovation allowance.
- If they are Businesses that carry on a mineral extraction trade.
- If they are Businesses who have claimed research and development allowance.
- If they are Pool betting duty.
- If they are Intermediaries treated as making employment payments.
- If they are Managed service companies.
- If they are Waste disposal.
Traditional accounting can be used to work out your taxable profits, if you cannot use cash basis.
How to record income and expenses
You must keep all records of the business income and expenses to work out your profit for your tax return.
Do not count any money you’re owed but haven’t yet received. With cash basis, only record income you actually received within the tax year.
Example; You have invoiced someone on 23 March 2015 but didn’t receive the money until 30 April 2015. Don’t record this income for your 2014 to 2015 tax return, but instead for 2015 to 2016.
When money is received or paid, you can choose how they are recorded (e.g. the date the money enters your account or the date an invoice is written) it is mandatory to use the same method each tax year.
All payments are accounted for; cash, card, cheque, payment in kind, bank transfer or any other method.
Allowable expenses are business costs, which allow you to deduct your income to calculate your taxable profit. This is an allowable deduction for Income Tax purposes. All allowable expenses, which are shown in the list below, help, reduce your Income Tax.
Money you owe isn’t counted as expenses until you pay have paid it. Only paid expenses are counted.
The examples of allowable business expenses if you’re using cash basis are:
- Things you use in your business, e.g. machinery, computers, vans.
- Day to day running costs, e.g. electricity, fuel.
- Buying goods for resale.
- Admin costs, e.g. stationery.
- Interest and charges up to £500, e.g. interest on bank overdrafts.
You can choose use the simplified expenses scheme instead of calculating expenses for the 2013 to 2014 tax year onwards, for the following:
- Using a vehicle.
- Working from home.
- Making changes for living on your business premises.
- Cars and other equipment
- You can claim the purchase of your car as a capital allowance, if you have bought it for the business (If you are not using simplified expenses to calculate your business expenses for that vehicle, then you cannot claim capital allowance).
- On the other hand, traditional accounting you can claim other equipment/office equipment you buy to use in your business/or business premises as a normal allowable business expense rather than as a capital allowance.
- If you want to switch to cash basis and currently claiming capital allowance, GM Professional Accountants can guide you on how you can switch to cash basis.
- Keep your records.
You are required to keep your records for six years; you do not need to send the record to HMRC. You are only required to send it if HMRC specifically ask for them.
The Cash Basis Method can be difficult to understand, so you can speak to GM Professional Accountants Tax Specialist about this.