Cash basis of accounting

Question 1

Which business can use cash basis

Answer 1

Unincorporated businesses (sole traders & partnerships) with receipts of less than £150,000 (300k if receive universal credit)

Question 2

When must a trader leave cash basis

Answer 2

If receipts in previous tax year exceeded £300,000

Question 3

When can a trader leave cash basis

Answer 3

if ‘commercial circumstances’ change and it is no longer appropraite

Question 4

Who is excluded from using cash basis

Answer 4

Companies and LLP

Question 5

Payments for capital assets (except cars, non-depreciating assets) are

Answer 5

deductible in calculating TTP and CA not available

Question 6

Receipts from the sale of capital assets are taxable

Answer 6

when received

Question 7

What can businesses using cash basis claim capital allowances for

Answer 7

Cars

Question 8

Calculating taxable profits for cash basis

Answer 8

total cash receipts - total allowable expenses paid

Question 9

Cash basis - when trader takes stock out of business without paying arms length price what amount should be added to profit

Answer 9

just and reasonable (e.g. cost and stock)

Question 10

Cash basis - What capital receipts are deducted from net profit

Answer 10

sale of cars, non-depreciating assets (buildings and land)

Question 11

Cash basis - When a trader ceases to use a capital asset for trade purposes, what happens

Answer 11

MV of asset at that date is treated as taxable receipt

Question 12

Cash basis - when trader ceases to trade the value of stock and WIP is treated as

Answer 12

taxable receipt in final POA

Question 13

Cash basis - capital expenditure - expenditure on capital assets (not cars or non-depreciating assets) is

Answer 13

an allowable expenses

Question 14

Cash basis - bad debts

Answer 14

Not allowable deduction, income only taxed when received

Question 15

Cash basis - leased cars

Answer 15

15% restriction does not apply, amounts paid are allowable in full

Question 16

Cash basis - Where capital assets are acquired under hire purchase…

Answer 16

deduction allowed for each payment under contract

Question 17

Cash basis - interest paid on loan is …

Answer 17

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)

Question 18

Cash basis - relief of losses

Answer 18

Only against future cash surpluses, not against other income or gains

Question 19

How is election to use cash basis made

Answer 19

tick ‘cash basis’ in self assessment return

Question 20

Cash basis election is effective for the tax year and all subsequent years unless

Answer 20

Traders receipts exceed limit (300k)
change of circumstances making it more appropriate to use GAAP and trader elects

Question 21

Property business default method for calculating property income is

Answer 21

cash basis if receipts are < £150,000

Question 22

New sole trader can use cash basis when

Answer 22

they meet criteria and elect to

Question 23

New property business can use cash basis when

Answer 23

if their receipts don’t exceed £150k, they will automatically use this basis

Question 24

if move accruals -> cash and fixed rate mileage allowance has previously been claimed

Answer 24

must continue to be used under cash basis

Question 25

move from accruals -> cash adjustment on capital assets

Answer 25

Deduction from trading profits for relevant proportion of balance on capital allowance pool (can be calculated on any just and reasonable basis)

Question 26

Move accruals -> cash adjust income to reflect

Answer 26

amount by which taxable profits have been under / over stated as a result of the change to cash basis

Question 27

Adjustment to income/expenditure when move to cash

Answer 27

Opening debtors + opening stock - opening creditors = adj expense / (income)

Question 28

Leave cash basis - plant and machinery

Answer 28

where acquired but not fully paid for (hire purchase( to obtain relief, unrelieved expenditure allocated to capital allowances pool in next period

Question 29

Leave cash basis - adj income expenditure

Answer 29

Opening debtors + opening stock - opening creditors = adj income / (expense)

Question 30

Adjustment income moving cash to accruals is

Answer 30

spread equally over 6 years and taxed as trading income

Question 31

interest on loan to invest in partnership/buy P&M in partnership is

Answer 31

not an allowable deduction§

Question 32

Proceeds from sale of P&M under cash basis - capital gains

Answer 32

taxed as trading receipts, excluded from CGT

Question 33

Cash basis - VAT

Answer 33

Can be registered, must use VAT Cash accounting scheme