Simpler Income Tax: a guide to the cash basis
Charterhouse helps corporates, individuals and small businesses alike to prepare their tax returns. In this article we examine the cash basis as a method that smaller businesses might employ to their advantage.
Cash basis is a way of working out your income and expenses for your Self Assessment tax return.
You can use cash basis if you:
- are a small self-employed businesses (sole traders and partnerships)
- have an income below the VAT threshold
How cash basis works
You can choose to record your business income and expenses over the tax year in one of the following ways:
- using cash basis - record money when it actually comes in and goes out of your business.
- using traditional accounting (accruals basis) - record income and expenses when you invoice your customers or receive a bill
Cash basis might suit smaller businesses because, at the end of the tax year, you won’t have to pay Income Tax on money you haven’t received yet.
What you have to do
You’ll need to keep records in a certain way and just tick the cash basis box on the form when you send HMRC your Self Assessment tax return.
Who can use cash basis
You can start to use cash basis if your total business income is below the VAT threshold.
Existing businesses using traditional accounting (accruals basis), might have to make some adjustments when they switch to cash basis.
You don’t have to use cash basis. You can decide if it suits your business.
When cash basis might not suit your business
Cash basis probably won’t suit your business if you:
- have losses that you want to set against other taxable income (‘sideways loss relief’ for existing businesses)
- want to deduct interest of more than £500
- run a business that’s more complex, eg you’re VAT registered, you have higher levels of stock, you produce detailed accounts for other business reasons
Who can’t use the scheme
Limited companies and limited liability partnerships can’t use cash basis. Along with other ‘specific’types of business.
Charterhouse is a forward thinking accountancy practice located in Beaconsfield and Harrow, providing services to many surrounding towns such as High Wycombe, Watford, Uxbridge, Slough, Maidenhead and of course London itself. Charterhouse writes blog articles to help provide insights and expert advice.