Election for the cash basis: A sole trader or partnership with other individuals may elect to compute their taxable trading profits on a cash basis, rather than the accruals basis. This was introduced to make matters simpler for small businesses. Watch out for the limits, though. The scheme is available to traders with receipts (not profits) of not more than £150,000 (2017/18). This is proportionately reduced for periods of less than 12 months. The election is made by ticking the box in the self- assessment return. From 2017/18, the cash basis also applies to unincorporated property businesses. It applies as the default basis but the accruals basis can be elected for if preferred.
Basis of assessment: Computing the taxable trading profits for an accounting period is the first step, but the basis is cash receipts less total expenses, with some differences. Expenditure on plant and machinery is deductible, except for cars. The list of disallowable expenses such as certain gifts and entertaining still apply when using the cash basis. Certain adjustments are irrelevant, such as adjustments for bad debts and the 15% car leasing adjustment. The normal current year basis rules of assessment apply to allocate the profit to a tax year. The profits calculated under the cash basis are also used to calculate Class 4 NICs.
Capital assets: Capital allowances are only available on cars under the cash basis. Otherwise, the purchase of other capital assets is allowed as an expense and capital receipts are taxable and any profit on plant and machinery is excluded from the charge to capital gains tax.
Loan interest: Loan interest is deductible as a trading expense subject to a maximum of £500 for a 12 month period.
Joining and leaving: The rules regarding joining the cash basis may appear complicated but they are designed to prevent income being taxed twice or expenses being deducted twice on the changeover. On leaving the scheme, adjustment income, to achieve the same result, may be spread over six years.