We will cover below the unincorporated businesses. We will focus at the optional rules which allow small unincorporated businesses to use the cash basis rather than the accruals basis to calculate their profits for tax purposes. If your business is in Sidcup, Bromley, Kent, London or nationwide we at Adiva Accountants in Sidcup can help by looking at whether this is an appropriate option for your business.
Accruals basis and cash basis
When using the accruals basis, the credit sales are included in the accounts income. This is regardless if the customer has paid or not for the goods or services by the end of the accounting period. But, when using the cash basis, the business income includes only the cash receipts received during the accounting period. So, under the cash basis credit sales are accounted for and taxed not when raised, but in the year in which they are paid for by the customer.
The main entry criteria to use the cash basis are that your business is unincorporated (sole trader or a partnership). And that your receipts in the accounting period are less than the VAT registration threshold in force at the end of the relevant tax year. The current VAT registration threshold is £83,000 (from 1 April 2016, previously £82,000). The threshold is set at twice the VAT registration threshold for those individuals who intend to make a Universal Credit claim.
Limited Liability Partnerships, Lloyd’s underwriters and those eligible individuals who wish to continue to claim averaging of profits, like farmers are excluded from using the cash basis.
Unless the business grows too large, or there is another ‘change of circumstances’ the individual once elected to use the scheme will generally have to remain in the scheme.
Important tax points
Cash receipts include all cash receipts that the business receives during the accounting period. Apart from the trading income, this will also include the proceeds from the sale of any plant and machinery. Any amount still unpaid from the customers by the accounting year end, will not be taxable until it is actually received by the business.
If your business is in Sidcup, Bromley, Kent, London or nationwide we can help and advice on the best option for your business. Please do contact us at Adiva Accountants in Sidcup if you would like further help or advice.