Usually, when you keep records you record income and payments upon issuing or receiving invoices. This often means you’ll have to account for money owed or owing to people outside of the business and this can be complicated if you have a small business.
Luckily in the 2013/14 tax year, cash basis accounting was introduced, which allows small businesses to keep records for when cash is received or spent instead of using the invoice dates.
You will still need to keep the same records for expenses as with traditional accounting, you just count them from the date money is transferred.
Advantages of cash basis
In addition to helping simplify the record-keeping process, cash basis can also save you tax by not having to record amounts that are owed to your business at the end of the business’ financial year. This reduces your income and therefore your profits and tax are also reduced.
Disadvantages of cash basis
The main disadvantage for cash basis is that just like above where you don’t include money owed to you at the end of the business’ financial year, you also cannot include money you owe, which would increase any tax due. Therefore if you are in a business where everyone pays upfront or straight away such as a grocery shop, cash basis may not be beneficial.
Cash basis also has a number of restrictions which means that if you use cash basis you may end up having to switch back to traditional accounting. This could be confusing when you’re accounting one way and then have to switch later on.
Who can use cash basis?
To use cash accounting you must have a small self-employed business, such as a sole trader with turnover or sales that are £82,000 or less per year. Limited companies cannot use cash basis.
You can find a list of other types of business that cannot use cash basis by clicking this link.
Cash basis and VAT
You can use cash basis if you are registered for VAT, providing you are still within the £82,000 maximum turnover limit.
When recording income and expenses for cash basis you can choose not to include the VAT amounts in your records, but you must either do this for both income and expenses or neither of them. If you choose to record VAT then you will need to record payments to HM Revenue and Customs for VAT as expenses and any VAT repayments as income.
You will still have to complete VAT returns and pay any VAT due.
If you would like any advice or assistance with cash basis or record keeping in general, please do not hesitate to contact us.