Cash Accounting for the Self-Employed

Posted by on Jan 17, 2016 in Guides | No Comments

If you are Self-Employed and running a small business, cash basis accounting may suit be a better option rather than traditional accounting.

Under Cash Accounting, you only declare money as it moves in and out of the business. As a result, at the end of the tax year, there will not be any Income Tax due on invoices sent to customers if they have not been paid in the period. However, you cannot claim for expenses unless they have been paid for.

In the following circumstances Cash Accounting would definitely not be the better option:

  • Where there is more than £500.00 of finance interest and bank charges incurred;
  • Where the business is more complex involving stock and fixed assets;
  • Where you may need to raise finance for the business as lenders will want to see a traditional set of accounts showing monies due and owed;
  • Where you have losses to offset against other taxable income under ‘sideways loss relief’.

To qualify for the Cash Accounting scheme, you must run a small Self-Employed business either as a Sole Trader or in Partnership and have an annual turnover of under £82,000.

If you have more than one business, you must use Cash Accounting for all and the combined turnover must be less than £82,000.

However, you stay in the scheme until the total business income exceeds £164,000 per year. Thereafter, you will need to use traditional accounting for your next tax return.

Certain specific types of businesses are not eligible for the scheme:

  • Lloyd’s underwriters
  • Farming businesses with a current herd basis election
  • Farming and creative businesses with a section 221 ITTOIA profit averaging election
  • Businesses that have claimed business premises renovation allowance
  • Businesses that carry on a mineral extraction trade
  • Businesses that have claimed research and development allowance
  • Dealers in securities
  • Ministers of religion
  • Intermediaries treated as making employment payments
  • Managed service companies
  • Waste disposal
  • Cemeteries and crematoria

Cash Accounting started from the 2013-14 tax year onwards. For an existing business to switch from traditional accounting would in all likelihood require some adjustments in the year of change.

Unlike traditional accounting, you claim other equipment you buy to keep and use in your business as a normal allowable business expense rather than as a capital allowance.

For VAT registered businesses, you can record your business income and expenses either excluding or including VAT. However, you must treat both income and expenses the same way.

If you choose to include VAT, you have to record:

  • VAT payments you make to HMRC as expenses
  • VAT repayments you receive from HMRC as income

If you would like to discuss your whether cash Accounting would suit your circumstances or have any questions, please contact welcome@cooperfaure.co.uk to arrange an initial free consultation.