CH7 Cash basis for accounting

Question 1

What is an unincorporated business?

Answer 1

Sole trader or partnership

Question 2

Usually, sole traders are expected to account on the x basis

Answer 2

accruals basis, using UK GAAP

Question 3

Why would it be an option to convert from a accruals to a cash basis?

Answer 3

For many sole traders, accounting on accruals basis provides no benefit, and accounting fees are therefore not justifiable. Cash basis simplifies tax reporting

Question 4

Paying tax on the cash basis essentially means that sole traders are paying tax on?

Answer 4

Cash receipts - total allowable business expenses

Idea is that they will pay less tax, given accruals pre payments etc arent taken into account

Question 5

To adjust the taxable profit, as normal we would add back disallowable expenses. However what are the key differences between accounting and cash for receipts and payments? LEARN WELL

Answer 5

1. Goods taken for owners own use - we only add back the cost figure (rather than sales price in accurals)

2.Where owner ceases to trade/use asset - there is a market value receipt on the value of that asset

3. Receipts from plant and machinary are taxable trading receipts (except cars).
4. No 15% disallowance for lease payments of high emmission cars
5. The interest paid on a loan is allowable up to £500
6. Payments to acquire plant and machinary (except cars) are allowable. Payments to acquire a car are disallowable - thus here we use either a fixed rate mileage allowance, or standard capital allowance (we are told what to use in the question).

Question 6

State whether the below are allowable or not. If not, say why? (cash basis)

1. Bank transfers from customers / purchase of goods
2. Interest received from bank
3. Standing order payments for utilities

Answer 6

1. Allowable
2. Disallowable - savings income not cash
3. Allowable

Question 7

What are the conditions required to be met to be able to join the cash basis

Answer 7

Sole trader’s cash receipts are max of 150,000 OR 300,000 if on universal credit

If a sole trader has multiple business, one must add up receipts from all businesses to get a total - not possible for some businesses to use accruals and some cash

Note these are apportioned over 12 months

Question 8

What allowances are used for cars?

Answer 8

Either your standard capital allowances

Or fixed rate mileage allowances

Question 9

Mei uses the accruals basis for year end 31 March 2023 (i.e. for the tax year
2022/23).

Her accounts for the year show revenue of £22,000 which includes £3,000 of receivables. For the tax year 2023/24 Mei decides to use the cash basis and in May 2023 she receives payment of £3,000 for the income already included in her 2022/23 tax return.

What adjustments need to be made?

Answer 9

Cash basis ignores any receivables / payables hence only recognises cash, thus in the year 23/24 we are told the cash is received hence we would go to recognise it.

HOWEVER, we know that given last year was an accruals basis, this 3000 has already been recognised.

To avoid recognising it twice, we deduct the 3000

Question 10

At 1 July 2022 the tax written down value on Nigel’s capital allowance main
pool was £6,000. One third of the balance relates to cars and the rest to other plant and machinery. Nigel does not claim the fixed rate mileage allowance for cars.

What are we able to deduct in terms of capital allowances?

Answer 10

Given 1/3 relates of the capital allowances are about a car, we know this cannot be included.

Therefore, TWDV allowances = 2/3 * 6000

We are then told the car does not claim a fixed rate mileage allowance, hence we use the standard WDA of 18%

1/3 * 6000 * 18%

Both are deducted seperately

Question 11

What could be a reason as to why a trader may want to revert back to accruals?

Answer 11

E.g they could have just got a new loan, and dont want the 500 interest limit deduction to restrict them