There are five conditions that need to be met to get the tax benefits of a pool car.

When is a car a pool car?

Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey. From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

The conditions

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

  1. The car is made available to, and actually is used by, more than one employee.
  2. In each case, it is made available by reason of the employee’s employment.
  3. The car is not ordinarily used by one employee to the exclusion of the others.
  4. In each case, any private use by the employee is merely incidental to the employee’s business use of the car.
  5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

The tax exemption only applies if all five conditions are met.

When private use is ‘merely incidental’

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car.

HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole. For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

Kept overnight at employee’s homes – the 60% test

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

When a benefit in kind tax charge arises

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

Partner note: ITEPA 2003, s. 167.

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Inspired by Grand Designs? You are entitled for a VAT refund if you build your own home.

VAT refunds for DIY builders

If you build your own house or convert an existing property into a home, you may be eligible to apply for a VAT refund on building materials and services. You do not need to be VAT registered to claim a refund.

What qualifies?

Refunds can be claimed in respect of building materials that are incorporated into the building and which cannot be removed without tools or without damaging the building. Refunds are available for materials used to build both new homes and for certain conversions.

A new home will qualify if it is separate and self-contained and you build it for you and your family to live in. The property must not be used for business purposes, although you are permitted to use one room as a home office.

Conversions will qualify if the property was previously used for non-residential purposes and is converted for residential use. Conversions of residential building will only qualify if they have not been lived in for at least 10 years.

Where you use a builder, the builder’s services will normally be zero-rated where they work on a new home. However, you can claim a refund for VAT charged by a builder working on a conversion.

What does not qualify?

Refunds are not available in respect of:

  • materials or services on which no VAT is payable because they are zero-rated or exempt;
  • professional fees, such as architects’ fees or surveyors’ fees;
  • costs of hiring machinery or equipment;
  • building materials which are not permanently attached to or part of the building;
  • fitted furniture, some gas and electrical appliances, carpets and garden ornaments.

A refund is also denied if the building is not capable of being sold separately, for example, as a result of planning restrictions.

How to claim

The claim is made on form 431NB where it relates to a new build and on form 431 where it relates to a conversion. The forms are available on the Gov.uk website. The claim must be made within three months of the date on which the building work was completed.

You must include all the relevant supporting documentation with your claim, such as valid VAT invoices to support the amount claimed. The refund will normally be issued within 30 days of making the claim.

Partner note: www.gov.uk/vat-building-new-home/eligibility.

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Make sure to share this article with anyone you know who runs a family business – so they can take advantage of the many ways to lower their tax bill!

Optimising tax-free benefits in family companies

Making use of statutory exemptions for certain benefits-in-kind offers an opportunity to extract funds from a family company without triggering a tax charge.

The essential point to note is that to make the tax saving, the benefit itself, rather than the funds with which to buy the benefit, must be provided.

Mobiles

No tax charge arises where an employer provides an employee with a mobile phone, irrespective of the level of private use. The exemption applies to one phone per employee.

A taxable benefit will however, arise if the employer meets the employee’s private bill for a mobile phone or if top-up vouchers are provided which can be used on any phone

Example

John and Jan Smith are directors of their family-owned company. Their two children also work for the company. The company takes out a contract for four mobile phones and provides each member of the family with a phone. The bills are paid directly to the phone provider by the company. The bills are deductible in computing profits. Each family member receives the use of a phone tax-free, which means they do not need to fund one from their post-tax income.

Pension contributions

Pensions remain a particularly tax-efficient form of savings since nearly everyone is entitled to receive relief on contributions up to an annual maximum regardless of whether they pay tax or not. The maximum amount on which a non-taxpayer can currently receive basic rate tax relief is £3,600. So an individual can pay in £2,880 a year, but £3,600 will be the amount actually invested by the pension provider. Higher amounts may be invested, but tax relief will not be given on the excess. Any tax relief received from HMRC on excess contributions may have to be repaid.

Pension contributions paid by a company in respect of its directors or employees are allowable unless there is an identifiable non-trade purpose. Contributions relating to a controlling director (one who owns more than 20% of the company’s share capital), or an employee who is a relative or close friend of the controlling director, may be queried by HMRC. In establishing whether a payment is for the purposes of the trade, HMRC will examine the company’s intentions in making the payment.

Pension contributions will be viewed in the light of the overall remuneration package and if the level of the package is excessive for the value of the work undertaken, the contributions may be disallowed. However, HMRC will generally accept that contributions are paid ‘wholly and exclusively for the purposes of the trade’ where the remuneration package paid is comparable with that paid to unconnected employees performing duties of similar value.

Other tax-free benefits

Subject to certain conditions being satisfied, other tax-free benefits that a family company may consider include:

  • bicycles or bicycle safety equipment for travel to work
  • gifts not costing more than £250 per year from any one donor
  • Christmas and other parties, dinners, etc, provided the total cost to the employer for each person attending is not more than £150 a year
  • one health screening and one medical check-up per employee, per year
  • the first £500 worth of pensions advice provided to an employee (including former and prospective employees) in a tax year
  • medical treatments recommended by employer-arranged occupational health services. The exemption is subject to an annual cap of £500 per employee

Employing family members, and providing them tax-free benefits, often enables a family-owned company to take advantage of the lower tax rates, personal allowances and exemptions that may be available to a spouse, civil partner, or children. In turn, this arrangement can help reduce the household’s overall tax bill.

Partner Note: ITEPA 2003, s 244, s 308C, s 319; BIM46035, BIM47105

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A quick summary of the new tax bands for CO2 car emissions which will be introduced from April next year:

Are low emissions cars tax efficient?

Significant changes are being made from 2020-21 to the company car tax benefits-in-kind bands affecting ultra-low emission vehicles (ULEVs).

The taxable benefit arising on a car is calculated using the car’s full manufacturer’s published UK list price, including the full value of any accessories. This figure is then multiplied by the ‘appropriate percentage’, which can be found by reference to the car’s CO2 emissions level. This will give the taxable value of the car benefit. The employee pays income tax on the final figure at their appropriate tax rate: 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers. This formula means that in general terms, the lower the C02 emissions of the car, the lower the resulting tax charge will be.

For 2019-20, the appropriate percentage for cars (whether fully electric or not) is 16% for those emitting 50g/km CO2 or below, and 19% for those emitting CO2 of between 51 and 75g/km. This means that the taxable benefit arising on a zero-emissions car costing, say £30,000 is £4,800, with tax payable of £960 for a basic rate taxpayer – for a higher rate taxpayer this equates to tax payable of £1,920

By way of comparison, a 2001cc petrol-engine car with a list price of £30,000, will attract an appropriate percentage of 37% in 2019-20. This equates to a taxable benefit charge of £11,100, and a liability of £2,220 a year for a basic rate taxpayer.

New bands

In April 2020, new ULEV rates will be introduced, and the most tax efficient cars will be those with CO2 emissions below 50g/km. There will also be additional financial incentives for electric only cars

From 2020-21, five new bandings are being introduced for full and hybrid electric cars. Fully electric (zero emissions) cars will attract an appropriate percentage of just 2%. This means that the tax benefit arising on an electric car costing say, £30,000 will be just £600. The resulting tax payable by a basic rate taxpayer will be £120 a year and £240 for a higher rate taxpayer.

For cars emitting CO2 of between 1 and 50g/km, the appropriate percentage will depend on the car’s electric range figure:

Mileage Percentage
130 miles or more  2%
70 – 129 miles 5%
40-69 miles 8%
30-39 miles 12%
Less than 30 miles 14%

ULEVs with CO2 emissions of between 50g-74g/km CO2 will be on a graduated scale from 15% to 19% (as is currently the case, diesel-only vehicles will continue to attract a further 4% surcharge) as follows:

CO2 emissions Percentage
51 to 54g/km 15%
55 to 59g/km 16%
60 to 64g/km 17%
65 to 69g/km 18%
70 to 74g/km 19%
75 or more 20%
Plus 1% per 5g/km
Up to a maximum 37%

Whilst the journey towards ‘greener’ driving has been, and continues to be, a rocky one, in 2014/15 a sub-130g/km petrol car was considered green enough to merit an 18% appropriate percentage. However, by 2020/21, the appropriate percentage on such a car will have risen to 30%. A sub-100g/km band car that was only subject to a 12% charge in 2014/15 will also have risen to 24% by 2020/21. On the other hand, clean air all-electric cars will finally plummet to 2% under the new company car tax incentives from April 2020.

The incentives in the new tax bands are clearly designed to encourage ULEVs as a company car driver’s car of choice, and with around 1 million company car drivers in the UK, this benefit is likely to remain one of the most popular and potent perks of a job.

Partner Note: ITEPA 2003, ss 139-142; Finance Act (2) Part 1 s2

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Don’t lose out on tax reliefs for start-ups

Just starting out
As long as HMRC can be satisfied that a business is being run on a commercial basis with a view to making a profit, they will usually allow taxpayers to claim tax relief for a trading loss in one tax year against other taxable income (for example PAYE income or a pension) from the same year, or the preceding year. This can be quite beneficial as the claimant can choose which year to claim the losses against. However, HMRC will usually restrict loss relief claimed by individuals who carry on a trade but spend an average of less than ten hours a week on commercial activities.
Early days
The provisions for tax relief on business losses can be particularly useful in the early years of trading. Broadly, this is because a loss incurred in any of the first four tax years of a new business may be carried back against total income of the three previous tax years, starting with the earliest year. Therefore, if tax has been paid in any of the previous three years, the taxpayer should be entitled to a repayment of tax, which may be especially welcome in those often difficult first few years of running a business.
The rules for this carry back stipulate that the maximum amount of the loss must be offset each year – it is not permissible to offset just a proportion of the loss in order to spread the loss across three years to take advantage of beneficial tax rates. Again, relief will not be available unless the taxpayer was trading on a commercial basis with a view to making a profit within a reasonable timescale. In practice, this requirement may be difficult to prove in the case of a new business and the taxpayer may need a viable business plan to support a claim.
Cap on relief
A cap now restricts certain previously unlimited income tax reliefs that may be deducted from income. Trade loss relief against general income, and early trade losses relief, as outlined above, are two areas where this restriction might apply. The cap is set at £50,000 or 25% of income, whichever is greater. ‘Income’ for the purposes of the cap is calculated as ‘total income liable to income tax’. This figure is then adjusted to include charitable donations made via payroll giving and to exclude pension contributions – the adjustment is designed to create a level playing field between those whose deductions are made before they pay income tax, and those whose deductions are made after tax. The result, known as ‘adjusted total income’, will be the measure of income for the purpose of the cap.
The cap applies to the year of the claim and any earlier or later years in which the relief claimed is allocated against total income. The limit does not apply to relief that is offset against profits from the same trade or property business.
No need to lose out
Where a loss is made in a tax year, but the trader does not have any other income against which it can be set, the loss can be carried forward indefinitely and used to reduce the first available profits of the same business in subsequent years.
Finally, losses arising from a business may be set off against any chargeable capital gains. Relief may be claimed for the tax year of the loss and/or the previous tax year. However, the trading loss first has to be used against any other income the taxpayer may have for the year of the claim (for example, against earnings from employment) in priority to any capital gains.

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Do you own a holiday cottage? You could get favourable tax treatment.

Furnished holiday lettings – is it worth qualifying?

When it comes to taxing rental income, not all properties are equal. Different rules apply to properties which meet the definition of ‘furnished holiday lettings’ (FHLs). While the rules now are not as generous as they once were, they still offer a number of tax advantages over other types of let.

Advantages

Properties that count as FHLs benefit from:

  • capital gains tax reliefs for traders (business asset rollover relief, entrepreneurs’ relief, relief for business assets and relief for loans for traders); and
  • plant and machinery capital allowances on items such as furniture, fixtures and fittings.

In addition, the profits count as earnings for pension purposes.

What counts as FHLs?

For a property to count as a FHL it must meet several tests. It must be in the UK or the European Economic Area (EEA), it must be furnished and it must be let commercially (i.e. with the intention of making a profit).

The property must also pass three occupancy conditions. The tests are applied on a tax year basis for an ongoing let, the first 12 months for a new let and the last 12 months when the let ceases.

The pattern of occupancy condition

The total of all lettings that exceed 31 continuous days in the year cannot exceed 155 days. If continuous lets of more than 31 days total more than 155 days in the tax year, the property is not a FHL.

The availability condition

The property must be let as furnished holiday accommodation for at least 210 days in the tax year. Periods where the taxpayer stays in the property are ignored as during these times the property is not available for letting.

The letting condition

The property must be commercially let as furnished holiday accommodation for at least 105 days in the year. Periods where the property is let to family or friends at reduced rate or free of charge are ignored as they do not count as commercial lets. Lets of longer than 31 days are also ignored, unless the let only exceeds 31 days as a result of unforeseen circumstances, such as the holidaymaker being unable to leave on time as a result of a delayed flight or becoming too ill to travel.

Second bite at the cherry

If seeking to secure FHL status, but the property does not meet the letting condition, all is not lost. Where the landlord has more than one property let as a FHL and the average rate of occupancy across the properties achieves the required 105 let days in the year, the condition can be met by making an averaging election.

A property may also be able to qualify if there was a genuine intention to meet the letting condition but this did not happen and the other occupancy conditions are met by making a period of grace election.

Further details on making averaging and period of grace elections can be found in HMRC helpsheet HS253 (see www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet).

Is it worth it?

While FHLs do enjoy favourable tax treatment, these are only available if the associated conditions are met. While FHLs, particularly in prime tourist locations, may be able to command high rental values in high season, the properties may lay empty for several weeks in the off season. By contrast, a longer term let will offer an element of security that multiple short lets may not provide. The decision as to whether striving to meet the conditions is worth it, is, as always, a personal one.

Partner note: ITTOIA 2005, Pt. 3, Ch. 6.

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If you might want to sell a property cheaply to a family member make sure you read this first.

At first sight, the calculation of a capital gain or loss on the disposal of an asset is relatively straightforward – simply the difference between the amount received for the sale of that asset and the cost of acquiring (and, where relevant) enhancing it, allowing for the incidental costs of acquisition and disposal. However, as with all rules there are exceptions, and particular care needs to be taken when disposing of an asset to other family members.

Spouses and civil partners

The actual consideration, if any, is ignored for transfers of assets between spouses and civil partners. Instead, the consideration is deemed to be that which gives rise to neither a gain nor a loss. The effect of this rule, which is very useful for tax planning purposes, is that the transferee simply assumes the transferors base cost – and the transferor has no capital gain to worry about.

Other connected persons

While the no gain/no loss rules for transfers between spouses and civil partners is useful from a tax perspective, the same cannot be said to be true for market value rule that applies to transfers between connected persons. Where two persons are connected, the actual consideration, if any, is ignored and instead the market value of the asset at the time of the transfer is used to work out any capital gain or loss.

The market value of an asset is the value that asset might reasonably be expected to fetch on sale in the open market.

Who are connected persons?

A person is connected with an individual if that person is:

  • the person’s spouse or civil partner;
  • a relative of the individual;
  • the spouse of civil partner of a relative of the individual;
  • the relative of the individual’s spouse or civil partner;
  • the spouse or civil partner of a relative of the individual’s spouse or civil partner.

For these purposes, a relative is a brother, sister or ancestor or lineal descendant. Fortunately, the term ‘relative’ in this context does not embrace all family relationships and excludes, for example, nephews, nieces, aunts, uncles and cousins (and thus the actual consideration is used in calculating any capital gain).

As noted above, the deemed market value rule does not apply to transfers between spouses and civil partners (to which the no gain/no loss rules applies), but it catches those to children, grandchildren, parents, grandparents, siblings – and also to their spouses and civil partners.

Example 1

Barbara has had a flat for many years which she has let out, while living in the family home. Her granddaughter Sophie has recently graduated and started work and is struggling to get on the property ladder. To help Sophie, Barbara sells the flat to her for £150,000. At the time of the sale it is worth £200,000.

As Barbara and Sophie are connected persons, the market value of £200,000 is used to work out Barbara’s capital gain rather than the actual consideration of £150,000. If she is unaware of this, the gain will be higher than expected (by £14,000 if Barbara basic rate band has been utilised), and Barbara may find that she is short of funds to pay the tax.

This problem may be exacerbated where the asset is gifted – the gain will be calculated by reference to market value, but there will be no actual consideration from which to pay the tax.

Partner note: TCGA 1992, ss. 17, 18, 272, 286.

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Today’s blog covers the things you need to know about entrepreneur’s relief to reduce capital gains tax.

Entrepreneurs’ relief is intended to reduce the rate of capital gains tax to a flat rate of 10% on certain qualifying business disposals. Certain aspects of the relief have recently changed, and this may affect any subsequent tax liability.

A qualifying business disposal must include a material disposal of business assets. For these purposes, a disposal of business assets is a disposal of:

  1. the whole or part of a business;
  2.  of (or of interests in) one or more assets in use, at the time at which the business ceases to be carried on, for the purposes of the business; or
  3. one or more assets consisting of (or of interests in) shares or securities of a company.

Formerly, to qualify for relief, the assets or shares had to be held by the individual for at least 12 months to the date of disposal. However, the length of ownership condition has recently been increased such that, for disposals made on and after 6 April 2019, the taxpayer will have to have held the assets or shares for at least 24 months for the relief to apply.

Shareholders

In order for a shareholder to claim on the disposal of shares, the following conditions generally need to be met:

  1. the company in which those shares are held must be the individual’s personal company;
  2. the shareholder must be an employee or officer of the company, or of a company in the same trading group; and
  3. the company must be a trading company or a holding company of a trading group.

All three of these conditions must be met for the whole of a 24-month period (for disposals from 6 April 2019) that ends with the disposal of the shares, cessation of the trade, or the company leaving the trading group and not becoming a member of another trading group.

Personal company

A company is the personal company of the individual at any time when all of the following conditions apply:

  1. the individual holds at least 5% of the ordinary share capital of the company;
  2. the individual can exercise at least 5% of the voting rights of the company which are associated with ordinary share capital;
  3. the individual is entitled to at least 5% of the profits available for distribution to the equity holders; and
  4. the individual would be entitled to at least 5% of the assets available on a winding up of the company.

Conditions numbered 3, and 4 were added for disposals made on and after 29 October 2018. However, the way the law was drafted would have made it difficult for some taxpayers to determine whether those conditions had been met for the full qualifying period. Therefore, the original draft legislation was modified before enactment to include an alternative test to both those, namely that in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds.

Shareholding threshold

Where an individual’s shareholding has fallen below 5%, as a result of a fundraising event involving the issue of additional shares which takes place on or after 6 April 2019. The equity funding share issue must be made wholly for cash and be made for commercial reasons, and not as part of arrangements driven by tax avoidance.

In these circumstances the shareholder will be entitled to the relief which would otherwise be lost, by making one or both of the following elections:

  • claim the relief on a deemed sale and reacquisition at market value at the point immediately before the additional shares are issued which removes the personal company qualification; or
  • defer taxation of the gain made on this deemed sale until the actual disposal of the shares.

The second election will generally be required as the taxpayer will make a deemed sale with no sale proceeds with which to pay the CGT due.

If neither of the elections is made the taxpayer will pay the CGT on the gain with no entrepreneurs’ relief at the time it arises.

Partner Note: FA 2011 s 9; FA 2019, s 39 and Sch 16; TCGA 1992, s 169ff

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Rent-a-room: Can you benefit?

Rent-a-room relief was introduced to encourage people to let spare rooms in their own home in order to increase the supply of low-cost rental accommodation. In return, the recipient is able to earn up to £7,500 a year tax-free.

Plans to restrict the relief so that it was only available where the occupation by the tenant overlapped with that of the landlord for at least one night have been abandoned – meaning that it is still possible to benefit from the relief for Airbnb-type lets where the property may be rented out for a short time in the landlord’s absence. It can also be used by those running a bed-and-breakfast.

Qualifying accommodation

To qualify the accommodation must be let furnished in the landlord’s home – it does not matter whether the home is owned or rented (but where rented, check that sub-letting is permitted). Where more than one person benefits from the income, the tax-free limit is halved, regardless of how many people share the income.

The relief

Rental income up to the rent-a-room limit is tax-free and does not need to be reported to HMRC. Where the rental income is more, the landlord has a choice:

  • work out rental profit in the usual way by deducting expenses from the rental income;
  • deduct the rent-a-room limit from the rental income and pay tax on the difference.

Using the rent-a-room limit will be beneficial where this is more than actual expenses. Where this route is taken, the relief should be claimed on the self-assessment tax return by ticking the appropriate box.

Case study 1

John is single and has a two-bedroom house. He lets out his spare room for £400 a month. He qualifies for rent-a-room relief. As his rental income of £4,800 is less than the rent-a-room limit, he does not need to declare it to HMRC.

Case study 2

Rob and Fiona are keen hikers and go away each weekend in the summer. They let out their Brighton flat via Airbnb while they are away. In 2018/19 they earned rental income £6,000, which they shared equally.

Rob and Fiona share the income and each have a rent-a-room limit of £3,750. As the rental income from letting out the flat (£3,000 each) is less than their rent-a-room limit, they are eligible for rent-a-room relief and do not need to report the income to HMRC.

Case study 3

Julie runs a B and B in Cheltenham. In 2018/19, she receives rental income of £12,000. Her expenses are £3,000.

As her rental income is more than £7,500 she must report it to HMRC. However, she can still benefit from rent-a-room relief by opting to work out her profit by deducting the rent-a-room limit of £7,500 rather than actual costs of £3,000. Thus, her taxable profit is only £4,500, rather than £9,000 (which would be the profit in the absence of rent-a-room relief). By claiming the relief, she will save tax of £900 if she is a basic rate taxpayer and tax of £1,800 if she is a higher rate taxpayer.

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Using the cash basis – is it for you?

The cash basis is a simpler way of working out taxable profits compared to the traditional accruals method. The cash basis takes account only of money in and money out – income is recognised when received and expenses are recognised when paid. By contrast, the accruals basis matches income and expenditure to the period to which it relates. Consequently, where the cash basis is used there is no need to recognise debtors, creditors, prepayments and accruals, as is the case under the accruals basis.

Example

Ben is a self-employed plumber. He prepares accounts to 31 March each year. On 28 March 2019 he fits a new shower, invoicing the customer £600 on 29 March 2019. The customer pays the bill on 7 April 2019.

He purchased the shower for £400 on 25 March 2019, receiving an invoice from his supplier dated the same date. He pays the bill on 8 April 2019 after he has been paid by the customer.

On the cash basis, the income of £600 and expenditure of £400 fall in the year to 31 March 2020 – they are recognised, respectively, when received and paid (in April 2019). By contrast, under the accruals basis, the income and expenditure falls into the year to 31 March 2019 as this is when the work was done and invoiced.

Who can use the cash basis?

The cash basis is available to small self-employed businesses (such as sole traders and partnerships) whose turnover computed on the cash basis is less than £150,000. Once a trader has elected to use the cash basis, they can continue to do so until their turnover exceeds £300,000. These limits are doubled for universal credit claimants.

Limited companies and limited liability partnerships cannot use the cash basis.

Advantages of the cash basis

The main advantage of the cash basis is its simplicity – there are no complicated accounting concepts to get to grips with. Because income is not recognised until it is received, it means that tax is not payable for a period on money that was not actually received in that period. This also provides automatic relief for bad debts without having to claim it.

Not for everyone

Despite the advantageous associated with its simplicity, the cash basis is not for everyone. The cash basis may not be the right basis for you if:

  • you want to claim a deduction for bank interest or charges of more than £500 (a £500 cap applies under the cash basis);
  • your business is more complex, for example, you hold high levels of stock;
  • your need to obtain finance – banks and other institutions often ask for accounts prepared on the accruals basis;
  • you want to claim sideways loss relief (i.e. set a trading loss against your other income) – this is not permitted under the cash basis.

Need to elect

If the cash basis is for you, you need to elect for it to apply by ticking the relevant box in your self-assessment return.

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