Switching to the cash basis

Newsletter issue - August 2017.

Many small, unincorporated businesses choose to use the 'cash basis' for working out taxable income. Under this method, participants will be taxed on the basis of the cash that passes through their books, rather than having to undertake complex and time-consuming calculations designed for larger businesses, who generally have to use 'traditional' methods for tax purposes. Whilst easing the administrative burdens of preparing 'traditional' accounts, using the cash basis can also help with cash flow.

For the 2017/18 tax year onwards, the eligibility income threshold for using the cash basis has been significantly raised - it is now £150,000 (previously £83,000), meaning that many more small businesses can now use the scheme. The exit threshold, above which businesses must cease to use the cash basis, has also been raised from 6 April 2017 to £300,000. This means that many businesses will be able to continue using the scheme as they continue to grow.

Where it has been identified that an existing business would benefit from switching to the cash basis, and it has been established that the eligibility criteria to do so has been satisfied, various one-off adjustments may be required to work out the business's profit for the period of the switch. The following list summaries areas where adjustments may be required, and if applicable, what action should be taken:

If the business is a new business in its first period of account, no adjustments will be necessary.

Further guidance on calculating taxable profits can be found in HMRC's help sheet HS222: How to calculate your taxable profits.

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