Introduction
- The Approach to this and all Articles is consistent with our Standard System and Procedure.
- The abovenamed Article gives “an overview” of the purpose to which the “substantive contents” of which are given below.
- This article will be continually “populated” and “grown”, on a regular basis making its functionality extremely powerful, as we hope that all the benefactors of this article will share their experience to benefit everyone of the users in future.
- By its nature this article is “dynamic” and it is recommended that a request be made for its update, where the last dated updated is greater than the last thirty working days.
What is Accounting on a Cash Basis?
- Accounting usually follows one of two concepts:
- Accruals basis;
- Cash basis.
- Accruals basis is when income and expenditure are recorded when they are incurred and not when they are paid.
- Cash basis is a method of recording these accounting transactions when they are paid or received.
Why Use Cash Basis?
- Cash basis accounting is a simpler process with less bookkeeping requirements.
- Tax can be deferred as it is only paid when monies have been received.
- It is a useful method of managing cashflow, as the accounts are not affected by debtors, creditors, accruals and prepayments.
Who Can Use The Cash Basis?
- The cash basis is only available for businesses that are conducting a trade, profession or vocation which are charged to income tax, i.e. those businesses which would otherwise be charged to tax under ITTOIA 2005, Pt. 2 (ITTOIA 2005, s. 31E(1)).
- Therefore, it is only available to those being charged under income tax.
- Your turnover under the sole trade or partnership should be less than £150,000 per year to be able to use this.
- This is not available to Limited Companies as they are not charged under ITTOIA and are instead subject to corporation tax under section 46 CTA 2009.
- Limited Liability partnerships are also excluded from using cash basis.
- There are also some specific types of businesses that can’t use the scheme:
- Lloyd’s underwriters;
- farming businesses with a current herd basis election;
- farming and creative businesses with a section 221 ITTOIA profit averaging election;
- businesses that have claimed business premises renovation allowance;
- businesses that carry on a mineral extraction trade;
- businesses that have claimed research and development allowance;
- dealers in securities;
- relief for mineral royalties;
- lease premiums;
- ministers of religion;
- pool betting duty;
- intermediaries treated as making employment payments;
- managed service companies;
- waste disposal;
- cemeteries and crematoria.
Is It Recommended To Use Cash Basis?
- There are certain instances where cash basis accounting may not be relevant and will not suit you if you:
- want to claim interest or bank charges of more than £500 as an expense;
- run a business that’s more complex, for example you have high levels of stock;
- need to get finance for your business – a bank could ask to see accounts drawn up using traditional accounting to see what you owe and are due before agreeing a loan;
- have losses that you want to offset against other taxable income (‘sideways loss relief’).