Simplified Accounting for Small Businesses

Simplified Accounting for Small Businesses

In order to simplify the accounting process for smaller businesses the government has recently announced that for the 2013/14 tax year sole traders and partnerships with sale income less than £79,000 will be entitled to use a cash basis when calculating the figures to be included on their tax returns. This would be instead of the more complicated accruals basis that all businesses currently use.

Businesses using cash accounting will be taxed on business receipts less allowable business expenses and certain flat rate expense allowances. The scheme can be utilised voluntarily, and HMRC will be notified of your choice by the simple ticking of a box on your self assessment tax return.

However, be wary as there are up and downs of utilising the scheme:

Advantages

  • Easily understandable so most individuals will have a better grasp of their own tax affairs
  • As simpler calculations are required you will spend less administration time keeping your records each year
  • You don’t pay tax on monies that haven’t been received by you yet
  • Tax relief is obtained for equipment purchases immediately irrespective of the amounts incurred
  • Claims for use of vehicles can be based on a flat rate mileage allowance rather than claiming all expenses incurred, plus writing down allowances, less a private use adjustment
  • Simpler deductions available for use of your home for business purposes based on a flat rate deduction
  • You can transfer back to accrual accounting at any time

Disadvantages

  • Any losses generated can’t be offset against other income in that tax year and instead will be carried forward and set against future profits of the business
  • Banks may not accept cash basis accounts as evidence to help obtain future funding
  • Any vehicles on which capital allowances have been claimed previously will still fall within the capital allowances regime and the flat rate mileage rate will not be available to use for them
  • Interest deductions on borrowings are restricted to £500, not the full amount paid
  • The scheme is more open to abuse as traders may stretch or reduce payment dates in order to manipulate their taxable income
  • Calculations for periods when joining or leaving the scheme will be more complicated than for a normal year
  • If you have more than one business you must take all trades into account when calculating whether you are eligible for the scheme
  • Ongoing feasibility of the business is more difficult to consider when only considering historic cash flow

Although the purpose of the scheme is to simplify the tax regime for smaller businesses, this demonstrates that care will need to be taken when deciding whether it is suitable for you. We would suggest that you speak to an accountant before opting to use the scheme.