The tax authority says that a move to a ‘cash basis’ scheme will help simplify their accounting processes and save small businesses time and money
The cash basis accounting option is open to sole traders and other unincorporated businesses with an annual income of less than £79,000, but not companies or Limited Liability Partnerships. Those eligible can choose to supply details of the cash received in a tax year, less any money spent on allowable business expenses, rather than producing a full set of accounts.
HMRC says this means small businesses will not be forced to spend time at the end of the tax year making complex accounting adjustments, and other calculations designed for larger businesses.
It singles out those providing services, such as hairdressers, window cleaners, taxi drivers, gardeners, painters and decorators, plumbers and electricians, as particularly likely to benefit from the switch.
Once a business has entered the cash basis scheme they can continue to report in this way until their income reaches double the VAT threshold (currently £158,000).
In addition, unincorporated businesses can choose to use ‘simplified expenses’. This involves using flat-rates, instead of making complex calculations of actual business expenses, in relation to the business costs for vehicles, use of the home for business, and private use of business premises as a home.
When originally announced in April 2013 the cash basis option caused controversy. While the Federation of Small Businesses welcomed the scheme, which it is estimated could apply to 3m small businesses, the ICAEW warned that a lack of formal accounts could make it harder for some businesses to access bank finance, while others might seek to manipulate their revenue to reduce their tax bill.