8. TC - Cash basis of accounting

Question 1

Who can elect to use the cash basis?

Answer 1

Small unincorporated businesses (ST and p’ships)

Question 2

How are cash basis trading profits calculated?

Answer 2

Total cash receipts
Less total allowable business expenses paid

Done by adjusting the figure in the accounts for tax purposes (e.g. goods taken for personal use by ST)
- Apply basis rules

Question 3

What are the differences when adjusting profit for tax calc when on cash basis vs accruals (taxable receipts only for this card)

Answer 3

• When the owner of the bus takes goods out for own use without paying arms length price, a ‘just and reasonable’ amount should be added to trading profits
• Capital receipts from sale of P&M are classed as taxable trading receipts, but receipts on sale of non-depn assets don’t class as trading receipts
• If the trader ceases to use capital asset for trade (i.e. takes for pvte use) the MV of the asset at that date is treated as taxable receipt
• If the trader ceases to trade, the MV of inventory (incl WIP) is treated as a taxable receipt in the final period of acc

Question 4

What are the differences when adjusting profit for tax calc when on cash basis vs accruals (taxable expenses only for this card)

Answer 4

• Most of the normal prof rules apply (e.g. if bus/pvte split, only bus proportion is allowable)
  Differences
• Payments to acquire P&M (except cars) are allowable expenses. No cap allowances will be claimed on these purch (includes vans and motorcycles)
• If P&M is bought under hire purch agreement, a deduction is allowed for each payment. Note that capital expenditure on non-depn assets (e.g. L&B is still not an allowable expense)
• Cap allowances are claimed on cars in the normal way. Alt, fixed rate mileage allowance can be claimed
• For leased cars, the 15% restriction for high emission cars does not apply
• Interest paid on a loan is an allowable exp (even if the loan was not wholly and exlusively for the purpose of trade) subject to max of £500pa
• Bad debts are not allowable exp as income is only taxed when it is received

Question 5

How is goods for own use accounted for using the cash basis?

Answer 5

• When the owner of the bus takes goods out for own use without paying arms length price, a ‘just and reasonable’ amount should be added to trading profits

Question 6

Hw is capital receipts from sale of P&M treated in cash basis?

Answer 6

• Capital receipts from sale of P&M are classed as taxable trading receipts, but receipts on sale of non-depn assets don’t class as trading receipts

Question 7

How is it dealt with when a trader cease to use a capital asset for trade when using the cash basis?

Answer 7

• If the trader ceases to use capital asset for trade (i.e. takes for pvte use) the MV of the asset at that date is treated as taxable receipt

Question 8

How is inventory dealt with on a cash basis when a trader ceases to trade on a cash basis?

Answer 8

• If the trader ceases to trade, the MV of inventory (incl WIP) is treated as a taxable receipt in the final period of acc

Question 9

How are payments to acquire P&M treated in a cash basis?

Answer 9

• Payments to acquire P&M (except cars) are allowable expenses. No cap allowances will be claimed on these purch (includes vans and motorcycles)

Question 10

How are hire purchases treated when using a cash basis?

Answer 10

• If P&M is bought under hire purch agreement, a deduction is allowed for each payment. Note that capital expenditure on non-depn assets (e.g. L&B is still not an allowable expense)

Question 11

How are motor expenses for purchase of car dealt with under cash scheme?

Answer 11

• Cap allowances are claimed on cars in the normal way. Alt, fixed rate mileage allowance can be claimed

Question 12

How are leased cars treated in cash accounting?

Answer 12

• For leased cars, the 15% restriction for high emission cars does not apply

Question 13

How is interest paid on a loan dealt with in cash accounting?

Answer 13

• Interest paid on a loan is an allowable exp (even if the loan was not wholly and exlusively for the purpose of trade) subject to max of £500pa

Question 14

How are bad debt expenses dealt with in cash accounting?

Answer 14

• Bad debts are not allowable exp as income is only taxed when it is received

Question 15

What are the conditions to start using the cash basis?

Answer 15

To START using the cash basis, businesses must have cash receipts for the year not exceeding the limit of £1.5mil
This is proportionately incr/decreased for periods other than 12 months
Combined receipts of all a traders businesses
Can elect to use it by ticking box on TR (and then applies to all that indivs businesses)

Question 16

What is the limit for joining the cash basis?

Answer 16

Cash receipts in the year for all the traders businesses must not exceed £1.5m over 12 months (time apportioned if diff)

Question 17

Is a trader automatically in the cash basis if they are under the cash receipts limit?

Answer 17

No, they can elect to use it by ticking box on TR (and then applies to all that indivs businesses)

Question 18

What are the rules surrounding changing from accruals to cash basis?

Answer 18

If commences trade and is eligible for criteria, then can elect for cash basis from commencement

• If prev on accrual basis, can just elect to move to cash if eligible
• If fixed rate mileage allowance has previously been claimed, must continue to claim
• In 1st year using cash basis, a deduction is made for the proportion of any TWDV on cap allowance pools which relates to P&M other than cars. Cap allowances continue to be claimed on cars
• Net adj inc/exp figure is added/deducted from profit to void double counting any included in prev year under accruals

Question 19

When does the election to use the cash basis effective from?

Answer 19

From the tax year it is made

Question 20

When is an indiv no longer able to continue using the cash basis?

Answer 20

Until either

• there is a change in circumstances when calculating profits using GAAP more appropriate to do so and the trader elects to
• the traders receipts exceeds the limit of £300,000 in previous tax year

Question 21

What is the threshold at which individuals have to leave the cash basis?

Answer 21

If receipts exceed £300,000 in the previous tax year (pro rated for longer/shorter periods)
Must ad together all combined receipts their businesses to decide whether they can continue to use cash basis

Question 22

What are the steps for when a trader leaves the cash basis?

Answer 22

• Any unrelieved exp on P&M must be allocated to cap allowances pool in next period. Only applies where asset has been acquired but not fully paid for (e.g. hire purch asset where payments are still to be made)
• Under cash basis, when capital asset (except cars/non-depn assets) are sold, the proceeds increase trading profits. This applies even if the cash basis no longer applies provided the expenditure on the asset was originally deducted under cash basis
• Net adjusted income/expenditure figure, which is given in exam is acc for as follows:
• • Adj exp is deductible in full in first acc period after leaving the cash basis
• • Adj income is spread equally over 6 years and taxed in the 6 tax yrs after the tax year leaving the cash basis. Trader cal make an election to tax this sooner

Question 23

How is any unrelieved expenditure on P&M dealt with when an indiv ceases to use the cash basis?

Answer 23

• Any unrelieved exp on P&M must be allocated to cap allowances pool in next period. Only applies where asset has been acquired but not fully paid for (e.g. hire purch asset where payments are still to be made)

Question 24

How are the sale of capital assets dealt with once a trader has moved from cash to accrual basis?

Answer 24

• Under cash basis, when capital asset (except cars/non-depn assets) are sold, the proceeds increase trading profits. This applies even if the cash basis no longer applies provided the expenditure on the asset was originally deducted under cash basis

Question 25

How is the net adjustment income/expenditure figure (given in the exam) when an individual ceases to use the cash basis?

Answer 25

• Net adjusted income/expenditure figure, which is given in exam is acc for as follows:
• • Adj exp is deductible in full in first acc period after leaving the cash basis
• • Adj income is spread equally over 6 years and taxed in the 6 tax yrs after the tax year leaving the cash basis. Trader cal make an election to tax this sooner

Question 26

What is the impact of the cash basis on partnerships?

Answer 26

If a partnership uses the cash basis, no partner can deduct from their total income the interest paid on a loan to invest in the partnership or buy P&M

Question 27

What is the impact of the cash basis on capital gains tax?

Answer 27

As proceeds from sale of P&M are taxable as trading receipts under the cash basis, they are exempt from CGT purposes

Question 28

What is the impact of the cash basis on VAT?

Answer 28

If a trader using the cash basis is registered for VAT, then they must also use the VAT cash accounting scheme

Question 29

What is the impact of the cash basis on NICs?

Answer 29

When calculating class 4 NICs a cash basis trader should use their adjusted profits as calculated under cash scheme