Starting in the 2024/25 tax year, unincorporated businesses must use a cash basis to calculate profits for tax purposes, though they can make a one-off election to use the accruals basis. The previous turnover thresholds of £150,000 to join the cash basis and £300,000 to leave the cash basis have been removed entirely. It’s important to note that certain businesses, including Limited Liability Partnerships and those with corporate partners cannot use the cash basis.
Differences Between Accruals Basis and Cash Basis
On an accrual basis, income is recorded when earned, even if payment hasn’t been received by the end of the accounting period. This includes credit sales that are taxed when invoiced.
On a cash basis, businesses are taxed only when cash is received, and expenses are paid: this means credit sales are only taxed when the customer has paid and expenses deductible when they have been paid.
Key Tax Points
Cash receipts: This includes all payments received, including trading income and sale of assets. Any payments not received by the end of the tax year are taxable once received in the next year.
Allowable deductions: Expenses must be paid in the accounting period and directly related to the business. Capital expenses like property purchases are not deductible, but most plant and machinery costs can be. Capital allowances still apply to vehicles.
Interest payments: Interest costs are generally deductible, except for interest on loans used for plant or machinery in a cash-based partnership which isn’t deductible for property purposes.
Losses: Losses incurred under the cash basis can be used similarly to those under the accruals basis.
Special rules apply when businesses enter or leave the cash basis, including specific capital allowance adjustments.
How We Can Help
There is more to the cash basis than might have been expected, which is why it is crucial to fully understand its implications before choosing it for your business.
At Fiander Tovell, we would be happy to review your circumstances to see if this would be suitable for you and your business.
For more information, consult the guide to find out more about cash basis for the self-employed and how to manage key tax points, or get in touch with us today.
Cash Accounting for VAT is a scheme that allows businesses to account for VAT based on the cash they receive and pay, rather than on invoices issued and received. This approach can be particularly beneficial for managing cash flow, as you only pay VAT on your sales once you’ve received payment from customers. However, it also comes with certain drawbacks that need careful consideration.
At Fiander Tovell, we specialise in helping businesses like yours navigate these complexities. Our team can guide you in determining whether the Cash Accounting Scheme is the right fit for your business, ensuring that you maximise its benefits while avoiding potential pitfalls.
Advantages:
By paying VAT only when you receive payment, you protect your finances from the strain of late customer payments.
If a customer fails to pay, you don’t have to pay the VAT, which automatically reduces the impact of bad debts.
Aligning VAT payments with actual cash flow makes it easier to manage your finances.
Disadvantages:
You can’t reclaim VAT on purchases until you’ve paid your suppliers, which might negatively impact cash flow.
If your business has significant upfront costs, like a start-up, the delayed VAT recovery could be a disadvantage.
Eligibility and Implementation
Our team will assess your eligibility for the Cash Accounting Scheme, considering factors like your taxable turnover, VAT return history, and business activities. We’ll also assist you in implementing the scheme, ensuring that your VAT accounting aligns with HMRC guidelines and that you don’t double-account for VAT on transactions.
Ongoing Support and Compliance
We provide ongoing support to help you stay compliant with VAT regulations. If your business grows and your annual turnover exceeds the scheme’s limit, we’ll guide you through the process of exiting the scheme, ensuring that your VAT obligations are met without unnecessary complications.
How We Can Help
At Fiander Tovell, we understand that every business has unique needs. Our experts will work with you to evaluate your cash flow, sales patterns, and supplier relationships to determine if the Cash Accounting Scheme aligns with your financial goals. We’ll guide you through the process of implementing the scheme and provide ongoing support to ensure compliance and optimal financial management.
If you like to learn more, please see our full guide on VAT cash accounting here or contact our Commercial Client Director, Fabrice Legris, at fabrice.legris@fiandertovell.co.uk
