Simpler Income Tax for the Simples Small Businesses

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As of the 2013/14 tax year, unincorporated businesses with an annual turnover below the VAT registration threshold (currently £77,000) will be permitted to use a simplified cash-based system to calculate their taxable income. Universal Credit recipients can also utilise the cash basis provided that their receipts for the year do not exceed twice the value of the VAT registration threshold (currently £154,000). Under such a system, the taxable profits of a business will equal total receipts minus the total of allowable expenses. This is an optional initiative and can be utilised on an as-required basis, allowing businesses to switch between the cash basis and normal tax rules each year, depending on circumstances. Treasury Minister David Gauke comments:

"We want the smallest businesses to be able to choose the method of accounting that works best for their business. The simplified system will provide this flexibility, give greater certainty, and simplify the tax calculations for many small businesses."

There are some restrictions with regard to who can use the cash basis regime:

  • Companies
  • Limited liability partnerships (LLPs)
  • Lloyd's underwriters
  • Businesses with a current herd basis election
  • Persons with a S221 profit averaging election
  • Some specific trades are also ineligible. Please contact us for more details.

Businesses need to be aware that by using a cash basis, they cannot claim for capital allowances. Nor can they carry businesses losses back or set them off "sideways" against other sources of income. We can advise you on the best decision in your circumstances before this new option comes into effect.

Another interesting development is that from the 2013/14 tax year, unincorporated businesses can take advantage of a number of flat-rate allowances to account for various expenses. These include:

  • Business mileage
  • Expenses associated with using the home for business purposes
  • Interest on cash borrowing, up to £500

These allowances will be available to qualifying businesses regardless of whether they use the cash basis regime or not. 

If you have any questions about the latest announcements and how they may affect you, please contact Peter Way-Rider.