(Last Updated On: 2nd December 2013)

We’ve mentioned before in our Newsletters about the proposed Cash Accounting Scheme, now called the Simpler Income Tax: Cash Basis scheme. It became effective from 6 April 2013.

Previously tax was calculated on adjusted accounting profits. I.e. you calculate your profits based on accounting rules and then adjust them for tax rules. The Cash Basis scheme removes the need to calculate accounting profits and instead use cash data as a basis for calculating tax due.

The Office for Tax Simplification suggested such a scheme for businesses with turnover up to £30,000, i.e. small micro businesses, who probably do most of the bookkeeping and tax returns themselves. The Government decided to expand the reach of the scheme. Therefore, the Cash Basis scheme can be used by self-employed businesses (including partnerships) if their income is £79,000 or less.

There have been improvements from the original scheme proposed after responses to the consultation from bodies such as the FSB and the ICAEW.

One of the criticisms of the scheme was that businesses using the scheme would have to use flat rate expense claims for some items of expenditure rather than using what they’d actually paid.   This could have penalised many businesses. The updated scheme does not require use of a flat rate mileage claim for example, which may have penalised those businesses who use their cars a lot for their business.

The updated scheme also removes the problem of switching between cash and accrual schemes on an annual basis, which would prove complicated. Once you’re on the scheme you can stay on it until your income reaches £158,000.

The scheme is optional, and I am sure many small businesses will want to explore if it’s a benefit to them. How will they know if it’s of benefit? By calculating their profits the old way and also the new way – I wonder how much time that will take!

To find out more HMRC guidance can be found here.

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