Simplified Accounting for Small BusinessPrint

From April 2013 small businesses which are run as sole traders and partnerships are able to use a new form of "Simpler income tax accounting" for tax purposes.

There are two aspects to simpler income tax accounting:

  • You can account for sales and purchases on a cash basis.

  • You can claim fixed rate expenses.

A business may use either or both in a tax year, however there are complicated rules to follow if you want to start or leave cash basis accounting and you are running an established business. The decision to change accounting basis is something that you will need to talk over with a qualified accountant.

Some of the key features of accounting on the cash basis

  • It is available to sole traders and partnerships but not Limited Liability Partnerships or companies

  • Sales and purchases are accounted for on a cash basis, so that you are only taxed on the income you have received in a tax year, less your actual business expenditure

  • You may start cash accounting provided that your turnover for VAT purposes is below the VAT registration threshold (currently £79,000). You must leave if once you have joined your turnover is more than double the VAT threshold).

  • Cash accounting compulsory for Universal Credit claimants

  • If you are already VAT registered you must also cash account for VAT

  • There are restrictions on what claims can be made for capital allowances because the rules allow tax relief automatically on some capital expenditure but no relief for other types of expenditure

  • There are special rules for leasing

  • There is also a restriction on how you can offset losses, and so if you anticipate making losses you will need to work out how to achieve the most tax relief before you complete your tax return

  • Loan interest relief is restricted to £500 in any tax year

  • Flat rates deductions for motoring and use of home

The main problems that taxpayers face with simpler income tax accounting are:

  • Being able to work out whether it is worth their while changing to cash accounting.

  • To decide, if necessary, when to change back to conventional accounting.

Fixed rate expenses are easier to understand and so all businesses will also be able to choose to deduct certain expenses on a flat rate basis. There is one aspect which is more complicated though, if you are cash accounting the type of expenses you can claim may be restricted and this may prevent you also claiming fixed rate expenses. A qualified accountant will be able to take you through the differences and calculate for you, each year the optimum amounts that you may claim for tax purposes.

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The information contained in this article is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. The author and the publisher disclaim all responsibility for any loss arising from any action taken or not taken by anyone using the information in this document