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Small unincorporated businesses can calculate their profits for tax purposes on a cash basis rather than the normal accruals basis. We look at the optional rules that allow for this, while also taking in the key tax points.
One example which illustrates the difference between the accruals basis and cash basis is that credit sales are included in the accruals basis accounts income despite the fact that the customer may not have paid for the goods or services by the end of the accounting period. Under the optional cash basis the business is taxed on its cash receipts less allowable cash payments made during the accounting period. So under the optional cash basis credit sales are accounted for and taxed in the year in which they are paid for by the customer.
The main entry criteria are that your business is unincorporated (sole trader or a partnership consisting only of individuals) and that your receipts in the accounting period are less than the entry threshold of £150,000. Once in the scheme, you can continue to use the cash basis until your income exceeds £300,000.
There are some individual exclusions from cash basis, for example, Limited Liability Partnerships, Lloyd’s underwriters and those eligible individuals who wish to continue to claim averaging of profits like farmers.
Once the cash basis election is made an individual will generally have to remain in the scheme unless the business either grows too large or there is another acceptable ‘change of circumstances.’ These matters are not considered further here.
Cash receipts literally mean all cash receipts that the business receives during the accounting period. As well as trading income this will also include the proceeds from the sale of any plant and machinery. If a customer does not pay what is owed by the accounting year end then it will not be taxable until the next year when it is actually received by the business.
In terms of what deductions can be claimed the main rules are that the expenses must have been actually paid in the accounting period as well as being incurred wholly and exclusively for the purposes of the trade.
As is the case with calculating taxable profits generally for a business no deductions are allowed for items which are of a capital nature such as the purchase of property. However, under the cash basis the costs of most plant and machinery can be included as a deduction. One key exception is the purchase of cars.
If you have a business loan or overdraft , interest payments up to a maximum limit of £500 can be claimed. If, in the future, you have a larger loan and wish to claim more interest as a deduction then this could be treated as a change of circumstances and result in you then having your accounts prepared on the accruals basis.
If your business incurs a loss then under the cash basis this can only be carried forward and set against profits of the same business in future years. This is not as advantageous as the normal rules which will allow the loss to be carried back or set off 'sideways' against other income.
In order to ensure that income is taxed and expenses are relieved 'once and once only' special calculations are needed on entering or leaving the cash basis.
This factsheet focuses on the current tax position of business motoring, a core consideration of many businesses. The aim is to provide a clear explanation of the tax deductions available on different types of vehicle expenditure in a variety of business scenarios.
The cost of purchasing capital equipment in a business is not a tax deductible expense. However tax relief is available on certain capital expenditure in the form of capital allowances.
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Under corporation tax self assessment large companies are required to pay their corporation tax in four quarterly instalment payments. This factsheet considers the rules regarding these payments.
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An optional system of fixed rate expenses applies for unincorporated businesses. We consider the optional rules which allow the use of a 'simplified' fixed rate deduction instead of actual costs.
If you are self employed and work from home this factsheet will summarise what homeworking costs you can claim for tax purposes.
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The 'IR35' rules are designed to prevent the avoidance of tax and national insurance contributions through the use of personal service companies and partnerships. This factsheet summarises what situations are caught by the rules and the implications of the rules.
Research and development (R&D) by companies is being actively encouraged through a range of tax incentives, which we consider in the points below.
The Construction Industry Scheme sets out special rules for tax and national insurance for those working in the construction industry. This factsheet considers the workings of the scheme.
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