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.

Time for Employers to Get Winter Ready

The UK is well known for coming to a standstill once extremes of weather kick in. With winter on the horizon, now is the time to get ready for the employment related implications of the impending cold, frosty weather and the potential upheaval to business that snow can bring.

Unpredicted, unusual weather often leaves employees in a spin as to whether they should be putting themselves at risk by tackling icy conditions to get into work. There is also the question as to whether staff who cannot make it in due to transport problems should be paid; what happens if you decide to close the premises and what obligations employers have for keeping staff safe and comfortable during cold weather spells. Let’s take a look at all these issues. 

The issue of pay

Where weather conditions are making it a challenge to get into work, employers are not under any obligation to remunerate staff for missed days. Whilst it is not the fault of the employee that they cannot make it in, neither is it the fault of the employer.

If you wish to maintain good relations with staff and to avoid causing them financial difficulties, you could offer to allow them to take the time as paid leave from their annual leave entitlement; or to make up the time in other ways, perhaps by getting in early or staying later once the weather has improved.

If you decide to close during inclement weather, it is customary to pay regular wages, unless it states otherwise in the contract of employment.

You could of course allow employees to work from home; getting key personnel set up for remote working is an excellent strategy which will help to keep your business running at all times of the year. 

The issue of childcare

Where workers with parental responsibilities are forced to take emergency time off because nurseries or schools are closed due to bad weather, this is a situation where there is an official entitlement to take unpaid leave. The time taken should be used to arrange alternative care for the dependent, rather than actually take care of them themselves. 

The issue of working conditions

For working environments where roles are stationary, the temperature must be at least 16 degrees Celsius. For active roles, the temperature must be a minimum of 13 degrees. This is according to Regulation 7 of the Workplace (Health, Safety and Welfare) Regulations 1992. If you have staff working outside during cold weather then you have a duty to ensure they are kept warm and hydrated. 

Ensure frequent breaks; provide advice on how to stay hydrated without resorting to alcohol or caffeine; show employees the importance of warming up muscles before commencing strenuous work and be sure to provide protective clothing such as insulated footwear, headwear and gloves. 

The issue of safety

It is vital that working conditions are safe for all workers. Make sure that slip hazards are minimised as far as possible by taking steps to clear ice and snow. If you have workers who are expected to drive as part of their role, ensure their vehicles are safety checked and equipped with torches, blankets, first aid kits, drinking water and other essentials. Also be sure to provide training in how to deal with typical cold weather related incidents. 

The issue of communication

Ensure you have a policy in place that sets out your expectations at times of extreme weather conditions. Without it, your workforce will be unclear as to the rules. Bear in mind the effect that adverse weather has on the overall supply chain, overheads and staff productivity when setting your policy so that you work to minimise the risk to your business.

Make it clear as to the methods by which staff will be advised about premises closures and any special arrangements. It could be a notice on the company website or intranet; an email or a text message.

You can talk to your local bookkeepers for advice on how to deal with these issues in the first instance, and of course you should take legal advice when it comes to putting together your extreme weather policy.

The Extended Working Day - Should Checking Emails on the Commute be Classed as Work Time?

Recent media discussion has raised the question of whether dealing with work emails whilst commuting to and from the workplace should be counted as part of the working day. Let’s take a look at what’s being said.

Researchers have found that commuters on their way to work were actually using their journeys to catch up on emails in advance of starting their working day, and that those on their way home were actually spending their commute completing work they hadn’t managed to finish during the working day.

Instead of providing flexibility with working, the study revealed that access to technology during the commute actually makes people work longer hours as well as increasing pressure.

“The findings raise questions about the work-life balance and whether it is healthy to stretch out the working day with people routinely answering emails beyond office hours”, the BBC said.

The working day has been extended, says study

Increased access to Wi-Fi on trains and the widespread adoption of smartphone use has extended the working day according to a study conducted by the University of the West of England. The study polled 5,000 rail passengers on commuter routes into London. It revealed that 54 per cent of commuters use the Wi-Fi on the train to send work emails, whilst others used their own data connections to do the same.

Those on the way to work were catching up with emails in advance of the working day, whilst returning commuters were finishing work off that they hadn’t managed to complete during the working day. The study showed that as internet access has improved, it has led to extended working hours on smartphones and laptops. Commuting parents even reported the journey as a ‘transition’ from parenting roles to working roles.

Many workers see the commute as an opportunity to clear the decks before they get home so they can put work behind them until the next day.

The research findings do raise questions concerning work-life balance and whether it is indeed healthy to stretch the working day both ways beyond office hours.

Should dealing with work related emails during the commute count as work time?

"There's a real challenge in deciding what constitutes work," said Dr Jain, from the university's Centre for Transport and Society who also said it would mean employers would want "more surveillance and accountability" for how commuters were spending their time before getting to their desks.

"This increasing flexibility has the potential to radically shift the work-life balance for the better - but it also leaves open the door to stress and lower productivity," said Jamie Kerr, of the Institute of Directors.

"With the concept of clocking on and clocking off no longer straightforward, defining where leisure begins and work ends will be vital for both employers and individuals, as well as a complex task for regulators."

A policy on working hours and how extra-curricular time is to be treated is vital. Be sure to take appropriate legal advice.

Government Guidance on VAT and Brexit

What are the implications of VAT for businesses if there’s no Brexit deal? That’s precisely what the recent guidance published by the government sets out to explain.

A situation where the UK leaves the European Union in a no-deal scenario is thought to be unlikely, given the mutual commitments of the UK and the EU in reaching a negotiated outcome. The government believes that negotiations are going well and that a positive deal should be on the cards. However, they do say that they have a duty, as a responsible government, to ‘prepare for all eventualities’, and that includes a no-deal scenario.

The government has been putting a programme of work in place over the past two years to make sure that the UK is primed and ready in all scenarios. So, as March 2019 approaches, it has found itself in a situation where preparations need to be accelerated. They have, therefore, put together a series of technical notices, with a view to helping individuals and businesses understand what would happen in a no-deal scenario, so that informed preparations can be made.

You will probably have received a notice from HMRC recently. This notice carried the aim of informing UK businesses of the implications for VAT rules for goods and services traded between the UK and EU member states should the situation arise that the UK exits the EU with no agreement.

The government is confident that a good deal will be reached that works for both sides, but as we said, all scenarios are being prepared for. In other words, it is contingency planning. The government is keen for businesses to be fully aware of how a no-deal scenario would affect them, and wants them to start taking steps to mitigate any risk, even if it is unlikely. They have issued a technical notice including early planning support on VAT to help businesses understand the potential impacts. They say that further details, including specific actions that businesses should take, will be provided in due course.

The government says that for most UK businesses, there will be no change to VAT rules. But for those that are affected, there are numerous technical notices designed to help, such as the Trading with the EU if there’s no Brexit deal notice, covering customs, excise and import processes at the border.

The UK will continue to have a VAT system after it exits the EU. The revenue that comes from VAT is crucial for funding public services. The VAT rules around UK domestic transactions will continue to apply to businesses in the same way as they do now.

If the UK exits the EU on 29 March 2019 without a deal, the government will aim to maintain VAT procedures as close as possible to how they currently run for continuity purposes. However, if there is no deal, then changes will be made to the VAT rules and procedures relating to transactions between the UK and EU member states. The government has taken decisions and actions where necessary in order to mitigate the impacts of these changes for businesses. The main changes that will take place are summarised here.

No changes will be made before March 2019; however it is important for businesses that are importing goods from the EU, exporting goods to the EU, supplying services to the EU and interacting with EU VAT IT systems such as the VAT Mini One Stop Shop (MOSS) to start to prepare now.

If you are uncertain as to where to look for advice, talk to your local bookkeepers in the first instance. They will point you in the right direction. Don’t delay in starting to prepare, because March 2019 is not far away.

The Law on Employing Children

If you are in an industry where employing children is the norm, you will need to know about the laws surrounding child employment, such as minimum ages and pay scales.

Child work and minimum ages

A child can start part time work when they reach the age of 13. This is the minimum age for part time work, other than when children are employed in television, theatre and modelling work. Any child working in these areas will require a performance licence.

When it comes to full time work, children are only permitted to commence such a role once they reach the minimum school leaving age. Once they do, they are allowed to work up to a maximum of 40 hours per week. When someone reaches the age of 18, they immediately attain adult employment rights. In England, all young people must either be in training or part time education until they are 18 years of age.

Paying children and young people for work

 

Children under the age of 16 are not entitled to the National Minimum Wage. Under the age of 16, there is no National Insurance to pay, so they do not need to be included on the payroll unless their total income exceeds their Personal Allowance.

Once a child reaches the age of 16, things change. Young workers between the ages of 16 and 17 are entitled to a minimum of £4.20 per hour. Their pay must be included in your running payroll. If they earn more than £116 per week then you must include them in your PAYE calculations.

Restrictions on child working

There are numerous restrictions in place when it comes to child working. For example, children are not permitted to work during school hours; for more than one hour before school, unless allowed under local bylaws; before 7am or after 7pm; in an industrial setting; without an employment permit issued by the local council’s education department (if required under local bylaws); for more than four hours without a break lasting a minimum of one hour; in any work that may be harmful to their health, well-being or education; without a two week break from any work during the school holidays for each calendar year and in most betting shop and pub roles and those prohibited by local bylaws.

Special rules apply during term and school holiday times.

During term time, children can only work up to 12 hours per week. This includes  maximum of two hours on Sundays and school days, and a maximum of five hours on Saturdays for those aged between 13 and 14 years, or 8 hours for 15-16 year olds.

During school holidays, children aged between 13 and 14 are only permitted to work up to 25 hours per week, including a maximum of five hours on Saturdays and weekdays, and a maximum of two hours on Sundays. 15-16 year olds can work up to 35 hours per week, including a maximum of 8 hours on Saturdays and weekdays, and up to two hours on Sundays.

Local bylaws and child working

 

Local bylaws vary and will set out the jobs that children cannot undertake if they are under the minimum school leaving age. Some will also restrict working hours, the type of employment that a child can undertake, and the conditions of that work. You’ll need to liaise with the education department of your local council or the education welfare service to learn more and ensure you are working within their parameters.

If you are in any doubt as to pay scales for child workers, your bookkeepers will be able to provide the guidance you need.