Cash basis for small businesses
If you run a small business as a sole trader or partnership, you will soon be able to choose how you record your income for tax purposes. Currently all businesses must account for money they owe and debts owed to the business. This is known as the accruals basis. From 6 April 2013, if your total receipts for the year are less than the VAT threshold (£77,000 from April 2012), you’ll be able to use a simpler cash basis to record business income.
Under the cash basis you must record sales when you receive the money, and expenses when you actually make the payment. A number of business expenses, such as use of your home or car, will be charged as flat rate amounts, so you won’t have to work out the detail. However, there is a downside: deductions for interest paid on loans will be restricted and you will not get immediate relief for any losses made.
The use of the cash basis will be optional, but if you make a claim for universal credit (from October 2013), you will be required to use the cash basis until your turnover reaches £154,000 per year.
A business operated as a company or LLP will not be permitted to use the cash basis. Also if your business becomes VAT registered you will be required to prepare VAT returns using the timing rules of that tax, which can be different in some cases.
We can help you decide if the cash basis will suit your business.