Cash Accounting Basis is a new basis of calculating profits and tax for small businesses in the UK, and is optional.
Cash Basis applies to sole traders and partnerships but not limited companies, and is subject to strict limitations.
You can opt for this scheme if your sales receipts are below £150,000 (from April 2017).
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 2016/17 Self Assessment, and your accounts are up to 5/4/17: If you had a bill dated March 2017, which you paid in May 2017, this expense
would not be allowed as a tax deduction for 2016/17 if you selected the Cash Basis
option. The tax deduction would be allowed for 2017/18, the year the bill was paid. Consequently you would pay more tax in 2016/17.
On the other hand, for a sale
, if your sales invoice
is dated March 2017, and you did not get paid until May 2017, if you chose the Cash Basis, you would not declare the sale until 2017/18, 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
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.