The Cash Basis Flashcards
Which businesses can use the cash basis?
only businesses which meet the following criteria
- unincorporated businesses (sole traders and partnerships)
- receipts for the tax year do not exceed £150,000
- a trader must leave the scheme if his receipts in the previous tax year exceeded twice the threshold (£300,000)
- a trader may leave the scheme if his ‘commercial circumstances’ change such that the scheme is no longer appropriate
- the limits are proportionately reduced for accounting periods of less than 12 months
- limits include the combined receipts of all the trader’s businesses must be considered in deciding whether a trader can use the scheme
- Companies and LLPs are excluded from using the cash basis.
Effect of the cash basis
- Capital expenditure on capital assets is allowed as a deduction when payment is made and capital allowances are not available. Disposal proceeds are treated as taxable income.
- Private use assets - if the expense is allowable restrict the non business element.
- cars - capital expenditure on cars is not allowable but capital allowances can still be claimed
- goods for own use - add a just and reasonable amount (cost price) to the income
- Bad debts - are not allowable as income is only taxed when it is received.
- Lease payments - the 15% restriction does not apply
- Ceasing to use an asset in the trade - the market value of the asset is treated as a taxable receipt
- Ceasing to trade - the value of stock and WIP is treated as a taxable receipt in the final period of account.
Election
an election to join the scheme is made by ticking the cash basis box in the SA tax return. The election applies to all the businesses run by the trader.
The election is effective for the tax year for which it is made and all subsequent tax years unless:
- the trader’s receipts exceed the eligibility limit or
There is a change in circumstances which makes it more appropriate to prepare accounts using UK GAAP
- the trader elects to calculate profits using UK GAAP.
Cash basis for property business
From 2017/18 the cash basis is extended to property business. It is the default method of calculating property incoem for unincorporated property businesses with cash receipts not exceeding £150,000 in the tax year, with some exclusions.
- An election can be made to opt our ot he cash basis and use the accurals basis instead
- The election has to be made each year
- Where cash receipts exceed £150,000 the cash basis cannot be used.
Starting to use cash basis
Existing business may start using cash basis provided it meets eligibility criteria
Capital assets - tax deduction can be claimed for TWDV b.f of capital assets (except cars, non depreciating assets and land) in the capital allowances pools
Adjustment income / expenditure
An adjustment is made to allow for double taxation arising as a result of the switch from the accruals basis to the cash basis eg
- where a tax deduction was given for sums owed to creditors under accruals basis and paid in current year under the cash basis
- where tax was paid in the previous year on income under the accruals basis but the cash is received under the payments basis
Ceasing to use the cash basis
Plant and machinery - whilst using the cash basis the acquisition of any capital assets (except cars, non depreciating assets and land) would normally be given tax relief on purchase. Where there is an asset which has been acquired but not fully paid (eg for a hire purchase asset) the unrelieved expenditure is allocated to a capital allowances pool in the next accounting period.
Adjustment income charge will be spread over 6 years unless the trader claims to accelerate the payment
Adjustment expense - allowed as a trading expense in the following accounting period
Interaction with other taxes
CGT - proceeds taxed as trade receipt
VAT - must use VAT cash basis
Class 4 NIC - calculated o profits calculated under cash basis
Income tax - no relief on interest on a loan to invest in a partnership if the partnership is taxed on the cash basis.
