In an attempt to simplify accounting and tax reporting for the smallest businesses, from 6 April 2013 small businesses can now choose to calculate profits/losses on the basis of the cash received and expenses paid out. This is known as the cash basis and it ignores debts owed by the business and any amount owing to it, until those amounts are paid. The normal accounting method is known as the accruals basis.
The cash basis will only be available to businesses which operate as sole traders or partnerships and whose turnover is under the VAT registration threshold (£79,000 from 1 April 2013). Some other businesses will be barred from using the cash basis and these include:
- All companies and LLPs
- Farmers using the herd basis
- Any business using profit averaging over several tax years
- Businesses in a mineral extraction trade and
- Lloyd’s underwriters
Once a business is using the cash basis it can continue to do so untils its annual turnover is twice the VAT registration threshold (£158,000 from April 2013)