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HMRC issues consultation document on small business taxation. 03/04/12

HMRC has published a consultation document on proposals for introducing a voluntary simplified cash basis for income tax and simplified arrangements for certain expenses, as announced in the Budget.
The legislation will be drawn up, after the consultation period of 27/03/12 to 22/06/12, to be included in the 2013 Finance Bill. HMRC has also said that they will be meeting with interested parties during the consultation period.

The new rules fall into two areas:

  • voluntary cash accounting
  • simplified expenses

The rules as to who will be permitted to use each are proposed as follows:

Those unable to use the cash basis

  • Property businesses: it is proposed to develop similar rules for these businesses in the future.
  • Any business that is registered for VAT but not using the VAT cash accounting scheme.
  • Businesses such as farmers or creative artists that have a current averaging claim.
  • Financial trading businesses and Lloyd’s members carrying on underwriting business will also be excluded.
  • LLPs.
  • Companies will not be permitted to use either the cash or simplified expenses rules, and must therefore continue to keep full detailed records of all income and expenditure and prepare accounts under GAAP for tax purposes.

Those able to use the cash basis

  • Any business other than companies (including LLPs) will be permitted to use the simplified expenses rules.
  • Self employed individuals and partnerships of individuals (but not LLP’s) will be permitted to use the voluntary cash basis. If they have turnover of less than £77,000 (on a cash basis) in a year to start using it (aligned with the VAT threshold). They can then remain within the scheme until their receipts reach £150,000 in a year. If they choose to use the voluntary cash basis, they must also use the simplified expenses rules.
  • Where a person (or a partner) has more than one unincorporated business potentially within these rules, then the cash basis is only available if all of them together are below the threshold.

How does it work?

Eligible businesses will merely record the business receipts in the period and the amounts paid in respect of allowable business expenses. As they are required to also use the simplified expenses rule, they must also record how many business miles they travel a year by car or by motorcycle, and estimate how many hours they spend working at home on their business. The cash basis must be operated on a fiscal year basis – that is from 6 April to 5 April. The taxable profit is the amount of receipts, less the allowable business payments, less the simplified expenses calculated.

What are allowable expenses?

  • Expenses incurred for the purpose of the business
  • Some purchased assets such as plant and machinery
  • Interest on purchases provided the purchase is allowable. This includes HP interest, trade credit charges and interest on a credit card provided it is used for business purchases.

What are disallowed expenses?

  • Other purchased assets such as investments in land, property and shares
  • Costs allowed by the simplified expenses rules
  • Entertaining and expenses for private purposes
  • Non-cash costs such as amortisation
  • Interest on cash borrowings, such as a bank loan
  • The withdrawal of cash for personal use, and
  • Payment of income tax or capital gains tax, and national insurance contributions.

If you are unsure of how this will work, or want a professionally qualified accountant to de-mystify the “red tape” for you, contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar to discuss how ABDS can help.

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail:

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