Cash basis of accounting Flashcards
Which business can use cash basis
Unincorporated businesses (sole traders & partnerships) with receipts of less than £150,000 (300k if receive universal credit)
When must a trader leave cash basis
If receipts in previous tax year exceeded £300,000
When can a trader leave cash basis
if ‘commercial circumstances’ change and it is no longer appropraite
Who is excluded from using cash basis
Companies and LLP
Payments for capital assets (except cars, non-depreciating assets) are
deductible in calculating TTP and CA not available
Receipts from the sale of capital assets are taxable
when received
What can businesses using cash basis claim capital allowances for
Cars
Calculating taxable profits for cash basis
total cash receipts - total allowable expenses paid
Cash basis - when trader takes stock out of business without paying arms length price what amount should be added to profit
just and reasonable (e.g. cost and stock)
Cash basis - What capital receipts are deducted from net profit
sale of cars, non-depreciating assets (buildings and land)
Cash basis - When a trader ceases to use a capital asset for trade purposes, what happens
MV of asset at that date is treated as taxable receipt
Cash basis - when trader ceases to trade the value of stock and WIP is treated as
taxable receipt in final POA
Cash basis - capital expenditure - expenditure on capital assets (not cars or non-depreciating assets) is
an allowable expenses
Cash basis - bad debts
Not allowable deduction, income only taxed when received
Cash basis - leased cars
15% restriction does not apply, amounts paid are allowable in full
Cash basis - Where capital assets are acquired under hire purchase…
deduction allowed for each payment under contract
Cash basis - interest paid on loan is …
deductible expense subject to maximum of £500 per 12 months only applies to loan interest (not interest charge for hire purchase or leased assets, supply of goods, credit card interest on allowable purchases)
Cash basis - relief of losses
Only against future cash surpluses, not against other income or gains
How is election to use cash basis made
tick ‘cash basis’ in self assessment return
Cash basis election is effective for the tax year and all subsequent years unless
Traders receipts exceed limit (300k)
change of circumstances making it more appropriate to use GAAP and trader elects
Property business default method for calculating property income is
cash basis if receipts are < £150,000
New sole trader can use cash basis when
they meet criteria and elect to
New property business can use cash basis when
if their receipts don’t exceed £150k, they will automatically use this basis
if move accruals -> cash and fixed rate mileage allowance has previously been claimed
must continue to be used under cash basis
move from accruals -> cash adjustment on capital assets
Deduction from trading profits for relevant proportion of balance on capital allowance pool (can be calculated on any just and reasonable basis)
Move accruals -> cash adjust income to reflect
amount by which taxable profits have been under / over stated as a result of the change to cash basis
Adjustment to income/expenditure when move to cash
Opening debtors + opening stock - opening creditors = adj expense / (income)
Leave cash basis - plant and machinery
where acquired but not fully paid for (hire purchase( to obtain relief, unrelieved expenditure allocated to capital allowances pool in next period
Leave cash basis - adj income expenditure
Opening debtors + opening stock - opening creditors = adj income / (expense)
Adjustment income moving cash to accruals is
spread equally over 6 years and taxed as trading income
interest on loan to invest in partnership/buy P&M in partnership is
not an allowable deduction§
Proceeds from sale of P&M under cash basis - capital gains
taxed as trading receipts, excluded from CGT
Cash basis - VAT
Can be registered, must use VAT Cash accounting scheme
