For some time now, unincorporated businesses have been able to submit simplified accounts in order to settle their tax liabilities. The main advantage of using this system is that income and expenditure is based on money received from customers and money paid to suppliers. In other words, the accruals basis, where income and outgoings are based on the value of invoices sent and received, is not applied.
Prior to 6 April 2017, the turnover threshold for the scheme was set at the VAT registration limit, £83,000 for 2016-17. In the budget this limit was increased to £150,000.
Adopting the cash basis does simplify the recording of transactions, but there are disadvantages and complications. For example:
- It is not possible to carry losses, accounted for using the cash basis, against previous year’s earnings or sideways against other income in which the loss was made. Losses can only be carried forwards.
- It is not clear how VAT registered businesses using the simplified cash scheme for accounts purposes, will prepare VAT returns from April 2017. Certainly, they would be eligible to use the separate Cash Accounting Scheme for VAT purposes and this may be the best solution.
- Interest costs are restricted to a maximum £500 per annum rather than the actual amount paid.
- Cash basis accounts do not give a true picture of business performance and this can be problematic for supporting loan applications.
- Flexibility in varying claims for capital allowances is lost, this can lead to wasted personal allowances in certain circumstances.
The use of the simplified cash basis does imply a saving in the time taken to record transactions for tax purposes, but as we have set out above there are possible complications and significant drawbacks.