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What is Accounting on a Cash Basis?
Accounting usually follows one of two concepts:
Accruals basis;
Cash basis.
Accruals basis is when income and expenditure are recorded when they are incurred and not when they are paid.
Cash basis is a method of recording these accounting transactions when they are paid or received.
Why Use Cash Basis?
Cash basis accounting is a simpler process with less bookkeeping requirements.
Tax can be deferred as it is only paid when monies have been received.
It is a useful method of managing cashflow, as the accounts are not affected by debtors, creditors, accruals and prepayments.
Who Can Use The Cash Basis?
The cash basis is only available for businesses that are conducting a trade, profession or vocation which are charged to income tax, i.e. those businesses which would otherwise be charged to tax under ITTOIA 2005, Pt. 2 (ITTOIA 2005, s. 31E(1)).
Therefore, it is only available to those being charged under income tax.
Your turnover under the sole trade or partnership should be less than £150,000 per year to be able to use this.
This is not available to Limited Companies as they are not charged under ITTOIA and are instead subject to corporation tax under section 46 CTA 2009.
Limited Liability partnerships are also excluded from using cash basis.
There are also some specific types of businesses that can’t use 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;
relief for mineral royalties;
lease premiums;
ministers of religion;
pool betting duty;
intermediaries treated as making employment payments;
managed service companies;
waste disposal;
cemeteries and crematoria.
Is It Recommended To Use Cash Basis?
There are certain instances where cash basis accounting may not be relevant and will not suit you if you:
want to claim interest or bank charges of more than £500 as an expense;
run a business that’s more complex, for example you have high levels of stock;
need to get finance for your business – a bank could ask to see accounts drawn up using traditional accounting to see what you owe and are due before agreeing a loan;
have losses that you want to offset against other taxable income (‘sideways loss relief’).
