For the 2017/2018 Budget the Chancellor confirmed that the entry threshold for cash basis accounting is to be raised from £83,000 (VAT threshold) to £150,000. It is a move designed to further simplify the accounting for unincorporated businesses and is part of the overall package of measures proposed as part of HMRC’s “making tax digital plans”. The exit threshold will continue to be set at double the entry threshold, so it will increase to £300,000. HMRC estimates that the new threshold will mean that an estimated 135,000 additional small businesses will be eligible to choose the cash basis for their business if they so wish. It will give them the option to benefit from a more simplified method of calculating taxable profits. This measure is not expected to have any significant economic effect and the changes in HMRC revenues is expected to be negligible.
However, cash basis accounting may not be suitable for all businesses. So make sure that you seek expert advice before making an election. It may not suit your business if you:
- Maintain high levels of stock.
- Wish to seek finance. The bank will almost certainly want to see accounts drawn up using traditional accounting so as to better understand your debt position.
- Have losses that you want to offset against other taxable income (“sideways loss relief”).
- Have complex trading relationships.
Cash basis versus accruals basis explained
What is the “accruals basis”? Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.
What is the “cash basis”? The cash basis allows businesses to account for their income and expenses when they actually receive payment or when they actually pay for an expense.
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