Income tax schemes for small businesses

HMRC has introduced two simpler income tax schemes for small businesses – ‘Cash Basis’ and ‘Simplified Expenses’. According to HMRC, they are designed to make it easier for small firms to manage their income tax obligations and be more confident “they have got their tax right”.

Cash basis

For the 2013-14 tax year and beyond, ‘Cash Basis’ is a new way that self-employed businesses (ie sole traders and partnerships) can calculate their income and expenses when completing their self-assessment tax return.

Cash Basis – who qualifies?

To qualify to use the scheme, your annual income as a self-employed business must not exceed the VAT registration threshold (currently £79,000). If your turnover increases above this figure during the tax year, you can remain in the scheme for the rest of that tax year, providing your turnover does not exceed £158,000.

The scheme is not relevant to limited companies and limited liability partnerships.

Cash Basis – how does it work?

You can record your income and expenses over the tax year either on a Cash Basis (ie when money actually enters and leaves your business, whether cash, card payment or cheque) or by using ‘traditional accounting’ methods (ie accruals basis – recording income and expenses when you invoice your customers or receive a bill). The choice is yours.

The Cash Basis scheme has been introduced because it is likely to better suit the cashflow circumstances of many smaller businesses at the end of the tax year, because they won’t have to pay income tax on money that hasn’t yet been received.

If you choose to use the Cash Basis scheme, when you send your 2013-2014 Self Assessment return, you tick the Cash Basis box on the form.

HMRC has produced a YouTube video that further explains the Cash Basis scheme.

Simplified Expenses

Self-employed businesses (ie sole traders and partnerships – not limited companies or limited liability partnerships) can use fixed rates (‘Simplified Expenses’) to calculate how much they can claim for certain common types of business expenses if business and private use is mixed.

Previously, businesses had to calculate the exact business-use proportion, which in many cases was complex and time-consuming.

Simplified expenses applies to:

  • Mileage expenses – you can now claim a standard mileage allowance based on total business mileage during the year.
  • Expenses generating by using home for business – you can now claim a flat rate based on hours spent using part of your home for business.
  • Adjustments for private use of business premises – a flat rate can now be used to cover some costs if you live at your business premises (eg if you run a B&B).

Simplified Expenses does not refer to any other types of expenses. All other expenses will still need to be calculated as previously.

Simplified Expenses – is it for you?

To qualify for home-use related Simplified Expenses, you must work at home for more than 25 hours a month. While the scheme will be helpful to many business owners, to others, who only have one type of expense to claim, the benefit could be limited.

You can start using simplified expenses from the 2013-2014 tax year, if it suits your circumstances. If it doesn’t, you can carry on as before. Use the simplified expenses checker on the GOV.UK website to compare using simplified expenses or calculating your expenses the usual way.

Simplified Expenses – record keeping

If you choose to use the Simplified Expenses scheme, you need to keep a record of your business miles, hours worked at home and/or how many people live with you at your business premises during the tax year.

At the end of the tax year, you calculate your allowable expenses using the flat rates for vehicles, use of home for business or private use of premises and include these amounts in your expenses in your self-assessment tax return.

Both the Cash Basis and Simplified Expenses schemes are optional, so you will need to consider whether your business will really benefit from using them. If necessary, seek advice from your accountant.

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