Cash Basis Print

Small businesses, including partnerships, can elect to calculate their profits on the basis of cash received, and expenses paid in the year. An election may only be made if Conditions A to C are met.

Condition A is that the aggregate cash basis receipts of each trade carried on by the person during that tax year does not exceed either:

£150,000, or

£300,000 where the person is an individual who is a universal credit claimant in the tax year, under the Welfare Reform Act 2012 or any corresponding provision made for Northern Ireland.

Condition B, which relates to partnerships is that where the person is an individual who controls a firm or a firm controlled by an individual the aggregate of the cash basis receipts of each trade carried on by the individual or the firm during that tax year does not exceed an amount equal to £300,000 There is also a requirement for the individual and the firm to make a cash basis election.

Condition C excludes the following 8 categories from the Cash Basis:

A partnership where one or more of the members is not an individual;

An LLP;

An individual who has been a Lloyds underwriter at any time during the basis period for that tax year;

A person who has made a herd basis election that has effect in relation to that tax year;

A person who has made a claim for the averaging basis in relation to that tax year;

A person who at any time within the period of 7 years prior to the commencement of the basis period for that tax year has obtained relief under the business premises renovation allowances;

A person who has carried on a mineral extraction trade during the basis period for that year;

At any time before the beginning of the basis period for the tax year, the person has obtained capital allowances in respect of research and development expenditure and continues to own an asset representing that expenditure.

Once made, the election applies for that year, and all following years until the individual no longer satisfies the conditions for the Cash Basis. The conditions are most likely to be breached where the turnover exceeds £300,000. However, it appears that if an individual wishes to breach the conditions he could do so at any time by forming a partnership where one of the members is a company.

An individual may elect to calculate his profits under generally accepted accounting practice if it is more appropriate to do so. For instance, if the trader receives an up-front payment for a contract which will straddle two or more accounting periods this could trigger a large tax charge in the period the payment is received, and it may well be more appropriate to elect out of the cash basis so that the payment may be spread over the period of the contract. An election may be made to re-enter the cash basis in future years where the conditions are again satisfied.

For a year in which the cash basis applies, in addition to the disapplication of the requirements to recognise income as earned or expenses incurred under generally accepted accounting principles, various other provisions which normally apply are disregarded. These include:

Capital allowances are not claimable. Instead the amount paid in the year is treated as an expense, provided the expense relates to plant and machinery, including integral features within a building, on which capital allowances would be due if an election for the cash basis is not made. Capital allowances, including balancing adjustments on disposal may however be claimed in respect of expenditure on a car used for business purposes.

No deduction is allowable for bad debts.

No deduction may be made for the provision of bonuses or other remuneration paid after the end of the accounting period.

Where an election for the cash basis is made, interest on loans is limited to £500. This is an odd provision as there is no requirement for the interest to be business related, but merely that the individual has paid interest during the basis period. If the interest paid is less than £500, then the allowable expense is restricted to the amount paid. This applies only to loan interest and not to other types of interest the trader may incur, such as hire-purchase interest, or credit-card interest on purchases used for business purposes. There is no restriction to the amount of interest that may be claimed in respect of these payments.

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