Is the cash basis right for you?
HMRC plans to expand the availability of cash basis accounts preparation, but will it win over businesses from the traditional accruals basis?
The cash basis can currently only be used if a business’s annual turnover doesn’t exceed £150,000, so one option from HMRC is to increase this turnover limit to £1.35 million. But will this actually increase uptake?
Why opt for cash basis accounting?
For some businesses, the cash basis is helpful as it stands, because there is no need to take account of debtors, prepayments, creditors and stock. It also allows most equipment purchases to be simply deducted as an expense.
But there are two significant restrictions:
- Currently, there is a £500 cap on interest costs. When interest rates are higher, this cap is not beneficial. Although HMRC is looking at increasing the limit – possibly to as high as £1,000 – the cap could remain a deterrent for some.
- Losses can only be carried forward – they cannot be relieved against other income or carried back. HMRC is considering relaxing these rules too, but relief is unlikely to be as generous as when traditional accruals basis accounting rules are applied.
New businesses, in particular, may have higher borrowings and be more likely to make a loss.
There is also less scope for tax planning. Using the traditional method, a capital allowance claim, for example, can be restricted to maximise use of the personal allowance. Not so with the simplified cash basis.
The accruals basis alternative
Beyond tax, there are several other reasons for preferring accruals basis accounting. Cash accounting is less precise in matching revenues earned with money laid out for expenses, resulting in a less accurate picture of a business’s performance. Such simplified accounts might turn out to be inadequate when it comes to applying for a business loan or a personal mortgage, for instance.