HM Revenue and Customs has urged small businesses such as cab drivers, window cleaners and hairdressers to make the most of a simpler system of recording income and outgoings throughout the tax year.
Small enterprises with annual incomes of £79,000 or less can take advantage of the cash basis of accounting for money that is transferred in and out of the business, as opposed to using the traditional practice based on accruals.
HMRC has distributed reminders to all unincorporated businesses, prompting them to consider simplified expenses, using flat rates as opposed to having to calculate actual business expenses.
The cash basis of accounting can be used for costs such as vehicles, business usage of residential space and private use of a business premises as a home.
Anita Monteith, technical manager of the Institute of Chartered Accountants in England and Wales (ICAEW) Tax Faculty, believes HMRC is raising the profile of the cash basis system following its relatively low take-up since launch in April 2013.
“Very few outside the tax profession know about it, and most of those within will not be using it for many clients because it is not appropriate,” said Monteith.
“The only way HMRC will know how many people choose to use the cash basis is by how many tick the box on the 2014 tax return to say they have.
“This is likely to raise problems. For example, how many taxpayers will say they have used the cash basis because they have no idea about accruals but were, in effect, previously doing it that way?”
Limited companies and limited liability partnerships cannot use the scheme; and the following:
Farming businesses with a current herd basis election
Farming and creative businesses with a section 221 ITTOIA profit averaging election
Businesses that have claimed business premises renovation allowance
Businesses that carry on a mineral extraction trade
Businesses that have claimed research and development allowance
Dealers in securities
Relief for mineral royalties
Ministers of religion
Pool betting duty
Intermediaries treated as making employment payments
Managed service companies
Cemeteries and crematoria
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