BIM72005 - Cash basis: overview

S24A ITTOIA 2005, S31E ITTOIA 2005, S74E ITA 2007

The cash basis is a simpler way of reporting income and expenses for income tax purposes for small businesses. It allows eligible businesses to account for business income and expenses when money is received or paid out, not on the date goods or services are invoiced. So instead of preparing a balance sheet and profit and loss account, the business records only need to show money when it comes in or goes out. As receipts are recognised as income of the period in which they are received and expenses are outgoings of the period in which they are paid, there is no need to account for debtors, creditors, stock and work in progress.

Use of the cash basis is the default method of accounting unless an election is made to calculate profits in accordance with generally accepted accounting principles.

There are also some specific types of businesses that cannot use cash basisÌý (see BIM72010)

Profits to be reported on the cash basis are:

The total amount of receipts of the trade received during the tax year

less

The total amount of expenses of the trade paid during the tax year

subject to any adjustment required or authorised by law in calculating profits for income tax purposes.

If the period of account does not align to the tax year, then references to the tax year are to be read as references to the period of account. ÌýProfits (or losses) for the tax year should then be determined in accordance with s7A, ITTOIA 2005 (see BIM81201)

바카라 사이트˜Received바카라 사이트™ and 바카라 사이트˜paid바카라 사이트™

The business can treat income as received and expenses as paid at the date of its choosing, as long as the treatment is consistent. For example, an expense may be paid when a card payment is made, or on the date that entry is shown on the bank statement.

VAT

The cash basis does not affect the way a business should account for VAT. For VAT-registered businesses using the cash basis, business receipts and payments may be recorded either excluding or including VAT. If VAT is included, the net VAT payments to HMRC should be recorded as expenses and net repayments from HMRC as receipts.

Note that the rules for determining the need for a business to register for VAT require income to be calculated in accordance with VAT rules which may not be the same as cash basis receipts.