Should I use simplified cash basis?

Financial reporting for small businesses can feel like a burden. If you’re running your own accounts, then even more so. There are several ways that small business owners can make the daunting more manageable…

Should I use simplified cash basis?

In this blog, we take a look at the basics of the cash basis system and outline the key factors determining if it’s the right option for your business.

What is the simplified cash basis?

Essentially, simplified cash basis is a way of reporting income and expenditure, designed to make it easier for small businesses to account for their income in a real-time way. In the past, there was one way of reporting accounts – the accruals system. In very simple terms, with this traditional system you had to account for expenses and income at the time they were billed, rather than when you were physically paid the money owed to you. In this sense, you would pay tax on the sums during a period of time, whether you had the money in the bank or not. The simplified cash basis enables small business owners to account for when they actually receive their income. This way, you can avoid complicated year-end stock-takes and/or calculations of accruals and prepayments.

Which system is better? Accruals or cash basis?

Unsurprisingly, as with all financial issues, there is no clear-cut winner between the two options. For sole traders using the cash basis can mean an easier to manage tax bill, paid when money reaches the account, rather than money that is due. There’s a turnover threshold, plus a host of other rules and regulations, as you would expect, plus there are a few negatives, too. Small limited companies, for example, aren’t able to use the cash basis, regardless of whether their turnover falls within the limits. There are also exemptions by trade, so it’s worth double checking that your business trade is eligible, too. Aside from that there are some other questions to ask: do you do your tax return yourself, or do you have expert help? The cash basis system is frequently believed to be easier for self-assessment purposes (but that’s a matter of opinion!).

How to decide if simplified cash basis is for you

If as a small business owner, you find that your clients pay you at a significantly later date than you bill them (say a 90-day payment scheme, or similar), then you might consider cash basis accounting an obvious choice. Before you jump in, here are some other things to consider.

You are eligible to use the cash basis:

  • Your turnover must be less than £150,000 pa (2017/18, or £83,000 for 2016/17). Or, if you are claiming universal credit, it’s £300,000 including benefits
  • If you are self employed
  • If you are a partner in a business (where the other partners are individuals only)
  • You have bank loans, loan interest and other financing costs up to £500 pa only

You cannot use cash basis if:

  • You use the profit averaging system
  • You have claimed business premises renovation allowance
  • Your business is a partnership (unless all the partners are individuals)
  • You’ve claimed the Research and Development Allowance
  • You are a religious minister
  • You already use the Herd basis
  • You run a company, or an LLP
  • Your loans, interest on loans or finance costs are more than £500 pa.

Nor can you use cash basis if your business trades in:

  • Waste disposal
  • Cemeteries or crematoria
  • Pool betting duty
  • Mineral extracting
  • Property
  • Lloyd’s underwriting
  • Securities
  • Lease premiums

If you think your cash flow would benefit from moving to a cash basis, there are a couple of ways you can do it. You can elect to use the option yourself. Remember, this is an opt-in basis and you must remember to declare you are using it. Also remember to keep proper business financial records. Using the cash basis is not a way to avoid detailed bookkeeping!

For further information on bookkeeping, or for advice on accounting processes and systems, get in touch today to discuss your personal business needs.

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