Cash Basis Accounting Explained

Cash basis accounting is a method often used by sole traders and partners to work out income and expenses for a Self-Assessment tax return. Many small business owners choose to use cash basis accounting rather than traditional accounting. Here we look at why that is, and how cash basis accounting works so you can decide whether it’s for you.

With cash basis accounting, you only need to declare money when it comes in and leaves your business. So, at the end of the tax year, you only have to pay Income Tax on the money you have received during your accounting period.

Is cash basis accounting right for me?

There are some instances when cash basis accounting won’t be the right choice for you. For example, if you run a business that is not straightforward, for example with extensive stock levels; if you wish to claim bank charges or interest in excess of £500 per year as an expense; if you have losses that you wish to offset against other taxable income, and if you have a need to obtain business finance, because you may be asked for accounts drawn up using traditional accounting.

Who can use cash basis accounting?

Any small self-employed business such as a sole trader or partnership can use cash basis accounting providing their annual turnover is £150,000 or less. If you run multiple businesses, then if you use cash basis accounting for one of them, then you must use it for the others. If the combined turnover for all your businesses exceeds £150,000 then you cannot use this accounting method.

You can however remain within the cash scheme if your income rises during the current tax year. So for example if you commence the tax year earning £140,000, but by October your turnover has increased to £200,000 then you can continue to use cash basis accounting for the rest of that tax year, providing your turnover does not exceed £300,000. If it does, then your next tax return will need to use traditional accounting.

Limited companies and limited liability partnerships are not permitted to use cash basis accounting. There are also certain other exceptions, a list of which can be found here.

Can I switch from traditional accounting to cash basis accounting?

If you qualify for cash basis accounting then you can switch from traditional accounting, however there may be some adjustments that need to be made, for which it is likely you will need professional guidance.

If you are in any doubt as to whether cash basis accounting is right for your business, talk to your bookkeepers. They will be able to advise you on an individual basis and guide you as to the best accounting method depending on your current and future needs.

A Guide to Self Employed Expenses

If you work on a self-employed basis, there are certain running costs that you are allowed to deduct from your overall turnover before you calculate your taxable profit. These are known as ‘allowable expenses’, and as a self-employed worker, it is important that you are aware of what these are, because if you don’t factor them in when you calculate your annual tax return, you could be missing out on potential savings which could be quite significant.

Allowable expenses do not include anything you take from your business to pay for things you buy for personal use. Limited company rules on expenses are different, and we’ll look at those in a separate post in the future. 

What can I claim as allowable expenses?

The following are allowable expenses which can be deducted from your taxable income as a self-employed worker:

Office costs – these include things like rent, rates, security costs, utility bills, insurance costs, telephone and internet, printing and printing supplies, postage, computer software and stationery.

Travelling costs – costs for the likes of fuel, parking and public transport fares are all classes as allowable expenses, as are hotel rooms, vehicle licence fees, repairs and servicing, vehicle insurance, breakdown cover and meals on overnight business trips.

Clothing expenses – if you wear a uniform for work or use protective clothing then you can claim expenses for these. Actors and entertainers can also claim for their costumes.

Staff costs – if you employee staff on any basis, or use subcontractors, then their salaries or fees are classed as allowable expenses. Bonuses, pensions, benefits, agency fees and employer’s National Insurance are also included.

Goods for resale – any goods you purchase to sell on are allowable expenses, as are raw materials and any direct costs incurred from the production of goods.

Financial costs – your costs for professional services such as an accountant, a solicitor, surveyors and architects are all allowable providing they are for business use. You can also claim for professional indemnity insurance cover, bank charges, interest paid on loans and hire purchase and leasing payments.

Advertising and marketing – if you advertise your business via any medium then you can claim those costs as allowable expenses. So for example print advertising, mailings, digital marketing costs, website hosting and free samples. You can also claim for subscriptions to professional or trade journals and trade or professional body membership, providing it is connected to your business. Client or supplier entertainment and event hospitality are not allowable expenses, neither are gym membership fees, payments to political parties or charity donations.

Any fines issued for breaking the law are not allowable expenses.

If you want to make sure you are claiming everything possible, why not take advice from your local bookkeepers? They know precisely what can and cannot be claimed for, and could even help to save you money on your annual tax return.

2018 Autumn Budget Summary

The Autumn Budget of 2018 has proved quite a beneficial one, particularly for the small business. Let’s take a look at some of the key points from this year’s Chancellor’s speech. 

Employment set to keep growing

With employment at a near record high, the Office for Budget Responsibility has forecast that it will keep growing. 3.3 million more people are in work since 2010, and it is reckoned that 800,000 more jobs will be available by 2022. 

National Living Wage to increase

From April 2019, the National Living Wage will rise from £7.83 per hour to £8.21 per hour, effectively benefiting in the region of 2.4 million workers, with a rise of £690 per year for those working full time. 

Tax-free Personal Allowance to rise

The tax-free Personal Allowance, the amount you earn before you start paying tax, will rise by £650 in April 2019 to £12,500. This is something that has been introduced earlier than planned, and it will be maintained in 2020. 

Higher Rate Threshold to increase

The amount higher earners can net before they pay tax at 40 per cent is set to increase from £46,350 to £50,000 in April 2019. So, in 2019-2020, there will be almost one million fewer higher rate taxpayers than in 2015-2016. 

Universal Credit work allowances increased

£1.7 billion will be invested into increasing existing work allowances in Universal Credit. This will see working parents and those with disabilities claiming Universal Credit £630 per year better off. There will also be additional help for people moving from existing benefits to Universal Credit as well as targeted support for those repaying debts. 

Travel benefits on the horizon

2019 will see fuel duty remaining frozen for the ninth year in a row, whilst short haul Air Passenger Duty will also stay the same for the eighth year running. Long haul rates are set to rise in line with inflation.

£30 billion will be invested to improve roads. A £28.8 billion National Roads Fund incorporates £25.3 billion for the Strategic Road Network to improve motorways, trunk roads and A-roads. It will also assist with the funding of the new network of local roads, to be called the Major Road Network, as well as larger local road projects. There will also be a fund of £420 million for local authorities to repair potholes and to repair tunnels and bridges, as well as £150 million to improve local traffic hotspots like roundabouts. 

Retail boost

Retail businesses will enjoy a £1.5 billion boost with business rates for smaller high street outlets seeing their rates bills slashed by a third for two years starting from April 2019. There will also be a £675 million investment into the improvement of transport links; the redevelopment of vacant shops into homes and offices, and the restoration of historic properties. 

Extra protection for businesses

The government will invest £1 billion more into defence over the next two years, providing the Ministry of Defence with more funds to help protect the country against cyber-attacks and other threats. 

Increase in the Annual Investment Allowance

The Annual Investment Allowance will rise from £200,000 to £1 million from 1 January 2019 to 31 December 2020 with the aim of helping businesses invest and grow. In addition, from October 2018 businesses will be able to deduct 2 per cent of the cost of any new non-residential structures and buildings off their profits before tax is due. 

Changes to the Apprenticeship Levy

Further changes to the Apprenticeship Levy will be introduced with a view to supporting employers. From April 2019, larger businesses may invest up to 25 per cent of their levy to support apprentices in their supply chain. For some employers there will be a cut of 50 per cent on what they currently pay for apprenticeship training, with the government to make up the shortfall. Further details will be released in early 2019.

Should you have any questions about how the latest Autumn Budget will affect your individual business, your local bookkeepers will make an excellent first port of call.