This month sees the introduction of a new cash basis for calculating taxable income for small unincorporated businesses.
The aim is to make it easier for small businesses to deal with their tax affairs.
By simplifying the calculation of taxable income for small unincorporated businesses, the objective is to give them greater certainty over the preparation of figures for their self-assessment tax return and to clarify and simplify self-assessment of business income.
The measures will allow taxpayers to choose the method of computing taxable income that best suits their business. They will not be appropriate for every small business.
The first measure will allow eligible unincorporated businesses to calculate taxable income on a simpler cash basis if this suits them. Theywill not have to compute figures on debtors, creditors and stock, or distinguish between capital and revenue expenditure and they will not have to compute capital allowances to arrive at a taxable income figure.
The second measure will allow all unincorporated businesses to use flat rate expenses for particular items of business expenditure.
Eligible small businesses will be able to calculate their taxable income by taking business cash received in a year and deducting allowable business cash expenses paid in a year. Generally, they will not not have to distinguish between revenue and capital expenditure.
From the 2013-14 tax year, all unincorporated businesses will be able deduct certain expenses on a simplified flat rate basis.
The key aspects of the cash basis are: it is optional and small unincorporated businesses can choose to use it if their receipts for the year are less than the amount of the VAT registration threshold (currently £79,000) or twice that for recipients of universal credit. Businesses must leave the cash basis once receipts exceed twice the VAT registration threshold and may leave if t is no longer appropriate for them
It will work on a cash flow basis. For income, it is what the business receives, when it is received; for outgoings, it is what the business pays, when it pays it. Income includes all means of payment – cash, card, cheque or any other form. A business’s income includes all amounts received in connection with the business, including those from the disposal of non-durable assets, for example plant and machinery.
Allowable expenses must be amounts paid wholly and exclusively for the purposes of the trade, including for non-durable assets. It will no longer be necessary to calculate and claim capital allowances.
Interest payments are allowed up to £500.
Business losses may be carried forward to set against the profits of future years but not carried back or offset sideways against other sources of income.
Rules on entering or leaving the cash basis are intended to ensure that income is taxed and expenses are relieved once only.
Simplified expenses are based on easier to follow rules that can be used when calculating some some spending and are all optional.
Fixed allowances may be used for business mileage. The car rate may be used for goods vehicles, such as vans, in some cases. A flat rate can be used to calculate expenses relating to business use of the home. A three-tier banded rate can also be used to calculate the adjustment for private use of business premises
For mileage, business use of the home and private use of business premises, the flat rates will be used rather than deductions for actual amounts, apportioned between business and private use. Simplified expenses can be used by any unincorporated business, whether or not they have chosen to use the cash basis.
The cash basis does not change the date that businesses will be able to make their books up to for a tax year, or the way a business should account for VAT. A business registered for VAT may enter details of its business income and expenses either: ■excluding VAT, or ■including VAT, in which case the net VAT payments to HMRC should be included as an expense, and net VAT repayments from HMRC should be included in receipts Profits calculated under the cash basis constitute profits used to calculate NICs.
Further information on the new basis of tax for small businesses can be obtained from Rennie Welch, 01573 224391.