Sole trader and partnerships with turnover up the the VAT threshold are allowed to prepare their income and expenditure account for tax purposes on the cash basis. Cash basis excludes from accounts events and transactions that haven’t yet resulted in a money being received or paid.
Cash accounting is anathema to accountants. Accountants have built their careers on fundamentals such as income being the value work done not cash received; and recording expenditure that relates to that income, not that just happens to have been paid that year. Accounts prepared based on work done, with associated expenditure, give a true picture of business performance. Many accountants therefore ignore the cash basis.
However there can be times when the cash basis is beneficial. If your business has significant amounts owed from customers at the end of the tax year then using the cash basis will delay paying the tax on that income for one year. This not only delays paying the tax, it could mean that income is taxed at a different tax rate if your total income levels are fluctuating.
If you are thinking of changing over to the cash basis do take professional tax advice as there are transitional rules to deal with. Also Cash Basis means claiming equipment costs (but not cars) as an expense instead of capital allowances.
Cash basis is championed by Government as a simplification. But do also be aware it can save you tax.
As with all of our tax tips and web pages this information is necessarily summarised and of a general nature. If you would like detailed specific advice please contact us.