The new cash basis: 'simpler' income and expenses?
April 2013 saw the introduction of a new cash basis for calculating taxable income for small unincorporated businesses.
The stated aim of the measures is to make it easier and simpler for small businesses to deal with their tax affairs.
By simplifying the calculation of taxable income for small unincorporated businesses, the objective is to give small businesses greater certainty over the preparation of taxable income figures for their self assessment tax return and to clarify and simplify self assessment of business income.
The measures allow taxpayers to choose the method of computing taxable income that best suits their business. However, they will not be appropriate for every small business.
General description of the measures
The first measure allows eligible unincorporated businesses to calculate taxable income figures on a simpler cash basis if this suits the business. Such businesses will not have to compute figures of debtors, creditors and stock, or distinguish between ‘capital’ and ‘revenue’ expenditure and they will not have to compute capital allowances to arrive at a taxable income figure.
The second measure allows all unincorporated businesses to choose to use flat rate expenses for particular items of business expenditure.
The new rules
Under the new rules, eligible small businesses will be able to calculate their taxable income by taking business cash received in a year and deducting allowable business cash expenses paid in a year. This will mean they will generally not have to distinguish between revenue and capital expenditure.
For flat rate expenses, legislation has been introduced with effect for the tax year 2013-14, to allow all unincorporated businesses to deduct certain expenses on a simplified flat rate basis.
The key aspects of the cash basis are that:
- it is an optional scheme which small unincorporated businesses can choose to use
- businesses can enter the cash basis if their receipts for the year are less than the amount of the VAT registration threshold (currently £79,000) or twice that (currently £158,000) for recipients of Universal Credit. Businesses must leave the cash basis after their receipts exceed twice the amount of the VAT registration threshold (currently £158,000)
- businesses can leave the cash basis if their commercial circumstances change such that it is no longer appropriate for them
- it will work on a cash flow basis. For income, it is what the business receives, when it is received; for outgoings, it is what the business pays, when it pays it. Income includes all means of payment, be it cash, card, cheque or any other form of payment
- a business’ income includes all amounts received in connection with the business including those from the disposal of non-durable assets, for example plant and machinery
- allowable expenses must be amounts paid wholly and exclusively for the purposes of the trade, including for non-durable assets. It will no longer be necessary to calculate and claim capital allowances. Interest payments are also allowed up to a limit of £500
- business losses may be carried forward to set against the profits of future years but not carried back or offset ‘sideways’ against other sources of income
- rules on entering or leaving the cash basis are intended to ensure that income is taxed once only and expenses are relieved once and once only.
Simplified expenses are based on ‘easier to follow’ rules that can be used when calculating some business expenses. These simplified expenses are all optional. They are:
- fixed allowances for business mileage (rather than deductions for actual expenditure on purchasing, maintaining and running a motor vehicle or motor cycle, apportioned between business and private use). The car rate may also be used for goods vehicles, such as vans in some cases
- a flat rate to calculate expenses relating to business use of the home (rather than deductions for actual amounts, apportioned between business and private use)
- a three tier banded rate to calculate the adjustment for private use of business premises (rather than deductions for actual amounts, apportioned between business and private use)
Simplified expenses can be used by any unincorporated business, whether or not they have already chosen to use the cash basis.
The cash basis does not change the date that businesses will be able to make their books up to for a tax year.
The cash basis does not change the way a business should account for VAT. A business registered for VAT may enter details of its business income and expenses either:
- excluding VAT (that is, with the VAT taken off), or
- including VAT, in which case the net VAT payments to HMRC should be included as an expense, and net VAT repayments from HMRC should be included in receipts
National Insurance Contributions (NICs)
Profits calculated under the cash basis constitute profits used to calculate NICs.