Chapter 21 Simplification Measures Flashcards
21.1 Introduction
Three separate measures exist to make income tax simpler for small unincorporated businesses:
• Flat rate expenses
• Cash basis
• The trading allowances
These measures are optional and are available to sole traders and partnerships.
21.2 Flat rate expenses
If an expense has both a business and a private element, HMRC permit a tax deduction for the business proportion of the expenditure, or if the expense is wholly and exclusively for the trade it can be deducted fully. To simplify this, an unincorporated business can choose to claim a flat rate expense for business motor expenses and any business use of their home. A separate claim is needed for both of these.
21.3 Motor expenses
The flat rate expenses covers expenditure in respect of acquisition, ownership, hire, leasing or use of vehicle. The amount of relief depends on the level of business mileage.
Cars and vans:
First 10,000 business miles 25p per mile
Additional business miles 45p per mile
Motorcycle:
All business miles 24p per mile
The business proportion of the finance element of a hire purchase or finance lease may also be claimed in addition. A business must use the flat rate expense consistently year after year for as long as the vehicle remains in the business, if they elect to use the this. No expenditure or capital allowances can be claimed if the business uses this. If a business has already claimed capital allowances in respect of a particular vehicle, the flat rate expense is not available for that vehicle, instead the business proportion of the expenses can be claimed as well as capital allowances.
21.4 Business Use of home
If an individual uses there home for business purposes, a monthly flat rate expense can be claimed instead of deducting the business proportion of expenses. Claiming this flat rate expense does not prevent a separate deduction being available for fixed costs where an identifiable amount can be attributed to business use. The expense is as follows:
Hours worked monthly expense
25-50 £10
51-100 £18
101+ £26
Where more than one person is working in the house at the same time, the hour is counted only once. The expense can vary each month of the accounting period, where a different number of hours are worked. A trader can decide for each period whether to claim the flat rate expense. Where a partnership makes a claim, it must consistently use the same rules for deductions in respect of other partner’s homes.
21.5 Business premises used partly as a home
Business premises can also be used as a home in some circumstances (for example a pub). A trader can only claim relief for the business element of the expenses incurred in connection with these premises and therefore must exclude the private element. Alternatively, where the premises are used mainly for business purposes, the trader can instead elect to claim tax relief for the actual costs incurred less a flat rate reduction to cover private use. The flat rate reduction is as follows:
Number of non-business occupants reduction per month
1 £350
2 £500
3+ £650
Mortgage interest, business rates and council tax are not covered by the flat rate reduction. Only the trade proportion of these costs should be deducted.
21.6-21.7 The cash basis for small businesses
Eligible sole traders and partnerships can use the cash basis instead of the accrual’s basis for accounting.
Total business receipts for the tax year must be less than £150,000. The limits for when the election can be made are proportionally reduced where the basis period for a tax year is less than 12 months. The election ceases to apply for the tax year following that in which business receipts exceed £300,000 unless receipts for the current year will not exceed £150,000.
An election also ceases to have effect if there is a change in the circumstances of the trade which makes it more appropriate for profits to be calculated in accordance with GAAP and the trader elects to calculate profits on this basis.
21.8 Eligibility involving partnerships
A partnership where all the partners are individuals may be eligible to use the cash basis. They are eligible on the same basis as sole traders; therefore an election can be made if the total partnership receipts do not exceed £150,000 at the end of the tax year. The election Is made by the nominated partner.
21.9 How the cash basis works
Income is accounted for when the income is actually received and allowable expenses are deducted when they are actually paid. This means there is no need to consider relief for bad debts. There are some differences in relation to the treatment of certain expenses that can be deducted:
Capital expenditure – under the cash basis, as a general rule capital expenditure is an allowable deduction, with some exceptions. Relief is not available for the acquisition of a car. Capital allowances cannot be claimed in respect of plant and machinery, instead the actual cost is deducted when paid. Since no deduction is allowed for cars, they are still eligible for capital allowances. No deduction is allowed under the cash basis for expenditure incurred on a structure or building and they cannot claim structures and building allowance.
Other expenses – there is a maximum amount of relief that can be deducted in respect of interest paid on a loan and incidental costs of obtaining loan finance, this is £500 each period. Interest charges on hire purchase or leasing plant and machinery and not part of the limit, nor are interest charges by trade suppliers of goods and services, or credit card interest on allowable purchases. There is a restriction for lease cars exceeding 110g/km.
21.10 Other points
Losses – where the trader uses the cash basis, trade losses can only be carried forward and set against future trading income, losses cannot be set against other income and capital gains relief is not available against gains. Terminal loss relief is still available against trading profits.
Deductible payments – any interest paid by an individual on a loan to purchase plant for the partnership or on a loan to invest in the partnership is not eligible for relief as a deductible payment.
Farmers – an election for averaging or the herd basis cannot be made whilst the cash basis is being used.
Flat rate expenses – if a trader using the cash basis decides to claim the flat rate expense for motor expenses in respect of a van or motorcycle, no deduction is allowed for the cost of the van or motorcycle.
21.11 Trading allowance
A trading allowance of £1,000 per tax year is available to individuals in respect of certain trading income. If the income does not exceed £1,000 the income is not charged to tax and HMRC do not need to be notified. An election can be made for the relief not to apply (if a loss has been made for example). If relevant income exceeds £1,000, an individual may elect to deduct the trading allowance of £1,000 from the income instead of allowable expenses. The elections must be made on or before the first anniversary of 31 January following the tax year for which the election is made. Relevant income is the gross income before deduction of expenses from all trades, other than those carried on in partnership, which would otherwise be taxable for the year.
