If you’re a sole trader, or running a business as a partnership, and turn over £81,000 or less per year, your business could take advantage of the new ‘cash basis’ accounting scheme, potentially saving you time and money.
Cash basis accounting
The scheme, which is open to all unincorporated businesses with income below this threshold (the same as the VAT registration limit), allows eligible firms to be taxed on the money which flows in and out of their businesses, rather than on profits calculated via traditional accounting rules.
Put simply, you work out your tax liability by adding up the total amount of cash your business received during the tax year, minus any money spent of business-related expenses.
All types of payment methods count – cash, credit cards and cheques, and it’s up to you how you record when a payment is made (when the actual funds hit your account, or the date a cheque is written out, for example).
If you want to take advantage of the scheme, which started in April 2013, you should tick the ‘cash basis’ box on the 2013/14 self assessment tax return form, and make keep all your records in a safe place.
According to HMRC, this type of accounting is likely to benefit firms providing services, typically on a cash-basis, including gardeners, hairdressers, painters and electricians. Importantly, it’s not available to incorporated businesses (limited companies and LLPs).
If you work out your tax liability using the tax basis scheme, and your business grows, you can stay on the scheme until your total income is twice the prevailing threshold (i.e. £162,000 for the 2014/15 tax year).
Simplified expenses
If you’re eligible to use the ‘cash basis’ method of accounting, you can also use ‘simplified expenses’, which allows you to use flat rates, rather than traditional (complex) methods of working out expenses. Typical expenses include using part of your home for business purposes, and vehicle-related costs.
For example, if you use your home for business puposes for 25 hours or more per month, you can use simplified expenses. Rather than claiming for a proportion of all your residential expenses (electricity, utilities), you apply a flat rate according to the number of hours you have worked at home.
Video Introduction
Here is HMRC’s YouTube introduction to the cash basis, and simplified expenses schemes below (around 23 minutes long).
Further Information
Find out more about ‘cash basis’ accounting here and simplified expenses here. (GOV.UK).
Follow Company Bug