Preparing tax return accounts at the last minute for a client?

Will cash accounting ease the pressure?

Cash accounting (CA) is primarily designed for unincorporated small businesses to help ease the burden of preparing formal accounts. During the tax return season, especially for the ever present ‘last minute’ clients, CA may be a great opportunity to simplify and speed up the process of accounts/tax return entries.

However, CA may not suit all clients and the table below looks at the advantages and disadvantages of the scheme.

Eligibility

Cash accounting can be used if the clients:

  • run a small self-employed business, for example sole trader or partnership
  • have a turnover of £150,000 or less a year.

If you have more than one business, you must use cash basis for all your businesses. The combined turnover from your businesses must be less than £150,000.

The client can stay in the scheme up to a total business turnover of £300,000 per year.

Limited companies and limited liability partnerships can’t use cash basis, neither can a number of specialist entities. These are mainly unlikely to be small businesses but there are some which may for instance:

  • farming and creative businesses with a section 221 ITTOIA profit averaging election
  • businesses that have claimed business premises renovation allowance
  • businesses that have claimed research and development allowance.

Businesses with increasing or volatile turnover would need to consider the cost of changing from one system to another.

Advantages and disadvantages

Issue

Advantage

Disadvantage

 

 

 

Accounts preparation

Simpler and quicker as businesses will not have to make year-end accounting adjustments. The figures will ignore the usual adjustments for debtors, creditors or stock and so getting the information from clients will be easier

 

More sophisticated accounts might be needed for banks and other funders. For instance they will need to see what was owing/owed and how much capital is tied up in areas like stock. So additional figures may need to be produced in addition to tax return CA accounts

 

 

  

It can be argued that a business needs to use accruals and other adjustments to get a true ‘picture’ of the performance of the business. Simple figures showing cash in/out might not be appropriate

 

 

Taxation

At the end of the tax year the business owners won't have to pay tax on income they haven't yet received.  There might also be tax advantages in the first year as areas like stock will not be an issue. This should have the effect of improving cashflow.

 

The tax deferral is only temporary, as the timing differences on debtors, stock and creditors will unwind in the future.

 

Tax calculations are simplified as there is no need to make adjustments for capital allowances for plant and machinery, as capital expenditure (apart from cars) will simply be relieved as and when it is incurred.

 

A choice on the amount of capital allowances claimed is not available under cash accounting and this may be detrimental to a taxpayer with low profits especially when they are covered by personal allowances

 

 

Capital allowance adjustments might still be required under cash accounting for expenditure on cars, if businesses choose not to apply the simplified expenses mileage rate.  There may also be other private use of asset adjustments

 

 

 

Interest on cash borrowings will only be allowable up to £500.

 

 

Negative results (losses) under the cash basis can be carried forward and set off against future profits of the same trade.

The use of losses for tax is restricted as generally there is no sideways loss relief in the year or carry back provisions.

 

 

 

If a business is changing to CA certain adjustments will need to be made for tax purposes.

 

 

The business has the option of using the simplified expenses basis for certain categories of expenditure.