Cash Basis Of Accounting

Question 1

Cash Basis: How are trading profits calculated?

Answer 1

Total cash receipts

MINUS

Total allowable business expenses paid

Question 2

Cash Basis: Approach to arrive at trading profits

Answer 2

Same as accruals basis:

1. Adjust figure for tax purposes
2. Basis periods

Question 3

Cash Basis: Adjusting profit for tax purposes: General rule

Answer 3

Same as accruals basis

Question 4

Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Owner removing goods for personal use without paying arms-length price

Answer 4

‘Just and reasonable’ amount added back

E.g. cost

Question 5

Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Amounts received from sale of P&M: Classification

Answer 5

Taxable trading receipts

Question 6

Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Amounts received from sale of P&M: Exception

Answer 6

CARS

Question 7

Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Receipts on sale of non-depreciating assets
E.g. land and buildings

Answer 7

(Still) Not taxable trading receipts
(So CGT)

Question 8

Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Trader ceases to use capital asset for trade
I.e. takes for private use

Answer 8

Taxable receipt

Of MARKET VALUE

Question 9

Cash Basis: Adjusting profit for tax purposes: Exception: Taxable receipts: Trader ceases trade

Answer 9

Taxable receipt of
inventory
At Market Value

Question 10

Cash Basis: Adjusting profit for tax purposes: Allowable expense payments: General rule

Answer 10

Same as accruals basis

Question 11

Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Payments to acquire P&M

Answer 11

Allowable
(No capital allowances claimed)

Question 12

Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Payments to acquire P&M: Exception

Answer 12

CARS

But not vans or motorcycles

Question 13

Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: P&M (except cars) bought under a hire purchase agreement

Answer 13

Deduction allowed for each payment

Question 14

Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Capital expenditure on non-depreciating assets (e.g. land and buildings)

Answer 14

Not allowable

Question 15

Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Payments to acquire cars

Answer 15

Not allowable

(Capital allowance/Fixed rate mileage allowance claimed on cars in the normal way)

Question 16

Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Leased cars: What to remember

Answer 16

15% restriction for high emission cars does not apply

Question 17

Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Interest paid on a loan

Answer 17

Allowable

Even if not all for trade purposes

Subject to a maximum of £500 p.a.

Question 18

Cash Basis: Adjusting profit for tax purposes: Exception: Allowable expense payments: Bad debts

Answer 18

Not allowable

(Because income only taxed when cash received from customer)

Question 19

Cash Basis: Condition for joining

Answer 19

Must have cash receipts for the TY not exceeding the limit

OBT limit = Combined receipts £150,000 - £300,000 recipients of universal credit) (Time apportioned)

Question 20

Cash Basis: Does it apply to all the sole trader’s businesses when selected?

Answer 20

Yes

Question 21

Cash Basis: Can a trader change to it from accruals basis?

Answer 21

Yes (If criteria met)

Question 22

Cash Basis: Changing to it: Can you stop claiming fixed rate mileage allowance

Answer 22

No (Must continue to be claimed)

Question 23

Cash Basis: First year: Capital allowances

Answer 23

Deduction
Made for proportion of any TWDV on CA pools relating to P&M (Other than cars)

Question 24

Cash Basis: First year: Capital allowances: On cars

Answer 24

Continues to be claimed
(Unless using a fixed rate mileage allowance)

Question 25

Cash Basis: First year: How to deal with double-counting income and expenditure that was accrued for but not yet paid?

Answer 25

Net adjustment:

Opening debtors
PLUS
Opening stock
MINUS
Opening creditors

Question 26

Cash Basis: When does it end?

Answer 26

1. Change in circumstances meaning
   Calculating profits using GAAP is more appropriate
   AND trader elects to do so
2. Trader’s receipt exceed the limit (OBT: £300,000)
   (Time apportioned & Combined receipts)

Question 27

Cash Basis: Leaving: Treatment of unreleaved P&M expenditure: ONLY when acquired but not fully paid for
E.g. Hire purchase

Answer 27

Allocated to Capital Allowances Pool in the next period

Question 28

Cash Basis: Leaving: Treatment of capital asset sold (except cars and non-depreciating assets)

Answer 28

Proceeds increase trading profits

EVEN IF cash basis no longer applies
PROVIDING expenditure was originally deducted under C.B.

Question 29

Cash Basis: Leaving: How is the net adjustment for income/expenditure accounted for?

Answer 29

1. Adjustment expense deductible in full
   In first accounting period after leaving C.B.
2. Adjustment income spread equally over 6 years
   Taxed in the 6 tax years after the one they leave

Question 30

Cash Basis: Leaving: Income/expenditure adjustment: Adjustment income: Can the trader elect to pay the tax sooner?

Answer 30

Yes

Question 31

Cash Basis: Impact on: Partnerships

Answer 31

No partner can deduct from the total income:
Interest paid on a loan to:
1 .Invest in the Pship
Or
2. Buy P&M

Question 32

Cash Basis: Impact on: Capital gains tax

Answer 32

Exempt
(Because proceeds from sale of P&M are taxable as trading receipts under the cash basis)

Question 33

Cash Basis: Impact on: VAT

Answer 33

Must also use the VAT cash accounting scheme
(If registered for VAT)

Question 34

Cash Basis: Impact on: (Class 4) NICs

Answer 34

Use tax adjusted profits as calculated under cash basis