Simpler Income Tax – Is the Cash Basis Suitable for You?

In a move to simplify declarations on annual Tax Returns, HM Revenue & Customs have introduced the ‘cash basis’ for those who have an income of £81,000 or less a year although there are exceptions.

Under the new rules, you are able to record only the money you have actually received as income in the tax year, and deduct only the expenses you have actually paid during the year.  Any money you are owed isn’t classed as income until it is received, and expenses are not able to be claimed until you have actually paid them.  There is no change in the types of expenses you are able to claim for, just the timing of when the claim can actually be made but there is a limit for interest and charges up to £500.

Declarations of your business income and expenses can be either including or excluding VAT, but you must treat the income and expenditure in the same way.  Those who choose to declare figures including VAT need to record the actual VAT payments to HMRC as an expense, and any repayments received as income.

Although this may sound attractive from an administrative point of view, the system will not benefit everybody and for some the scheme may be prejudicial if any of the following reasons apply;

• The cash basis can produce uneven results and means that budgeting for tax payments may become very difficult.
• There could be wasted personal allowances.
• Losses cannot be set against your other taxable income.
• You could require detailed accounts for other purposes e.g. a loan.
• If you wish to opt for the cash basis, this would require an annual review which would incur additional costs.

Each case should be considered individually, and advice should be sought for anyone who is unclear before adopting the new method.