Ainsworth & Co, Chartered Accountants and Business Advisors.

Cash Accounting Basis

Cash Accounting Basis is a new basis of calculating profits and tax for small businesses in the UK from April 2013, and is optional.

Cash Basis applies to sole traders and partnerships but not companies, and is subject to strict limitations.

You can opt for this scheme if your sales receipts are below the VAT threshold (£79,000 from April 2013) and this threshold is doubled if you receive Universal Credit.

The main basis for calculating profit and tax is still the 'accruals' basis.

What are these different ways of calculating profit and tax?

For example: If your are completing your 2013/14 Self Assessment, and your accounts are up to 5/4/14: If you had a bill dated March 2014, which you paid in May 2014, this expense would not be allowed as a tax deduction for 2013/14 if you selected the Cash Basis option. The tax deduction would be allowed for 2014/15. Consequently you would pay more tax in 2013/14.

On the other hand, for a sale, if your sales invoice is dated March 2014, and you did not get paid until May 2004, if you chose the Cash Basis, you would not declare the sale until 2014/15, and therefore delay the tax.

The Accruals Basis puts sales and expenses by the date of the sale or expense, ie. the invoice date, not the date they are paid.

So which makes more sense? You may conclude that with 'swings and roundabouts' and lots of sales, the cash basis would even itself out. It might, but it might not. Certainly Cash Basis will probably be easier for most small businesses.

The accruals basis is used for larger businesses because it more accurately matches the sale with the cost of the sale in the same accounting period. Of course, this requires more accounting expertise to get it right, and it make reporting more meaningful. The accruals basis is also a legal requirement for larger business.

However, HMRC have accepted that for small businesses, the extra accounting cost might be an extra burden, and therefore the Cash Basis option has been introduced.

If you choose this option, you will simply record your sales and purchases on the day you received or paid the cash. You might be doing this anyway. However, if you have an accountant, the accountant will be making some attempt to amend your final accounts to an accruals basis by examining your paperwork.

This was just an outline, there are some rules to be aware of. Here are some useful links:

UK Gov Guide - Simpler Income Tax: Cash Basis

Simpler Income Tax Cash Basis - What it means for the self employed

Choosing the right software

QuickBooks Online 'Simple Start' is ideal for Cash Accounting, with the advantage that you have access to your records from tablets and smartphones.

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