Eligibility for the simplified cash basis

Produced by Tolley

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Eligibility for the simplified cash basis
  • Criteria for cash basis for small business
  • Excluded persons
  • What are cash basis receipts?
  • How are profits calculated under the cash basis?
  • How are trading losses utilised under the cash basis?
  • Electing in to and out of the cash basis

Eligibility for the simplified cash basis

The simplified cash basis for small businesses (hereafter referred to as the ‘cash basis’) is a simplified form of accounting. It is intended to make the calculation of trading profits easier by accounting for income and expenditure based on money received from customers and money paid to suppliers. See Simon’s Taxes B2.112.

Criteria for cash basis for small business

A person can elect for the cash basis to apply if their cash basis receipts do not exceed £150,000 (£300,000 for universal credit claimants) and they are not otherwise excluded ― see below.

The thresholds (referred to in the legislation as the ‘relevant maximum’) are reduced if there is a short basis period. They are not however similarly increased for long basis periods.

Where an individual is controlled by a partnership or where a partnership is controlled by an individual, the threshold limits apply to all trades carried on by the individual or partnership in a tax year. A person controls a partnership if he has the right to more than one half of the assets or income of the partnership. If two partners own a partnership equally, there is no controlling partner. For non-controlling partners, whether they are in a partnership with a controlling partner or not, only the cash basis receipts of their separate sole trades are aggregated to establish eligibility to use the cash basis for those trades. It does not matter whether the partnership also uses the cash basis or not.

A business must leave the cash basis in the tax year following the year in which their cash basis receipts exceed £300,000, unless receipts are back down to the £150,000 threshold in that year.

The overall effects of these conditions are:

  1. where a person is not within the cash basis, their total receipts in a tax year must not exceed the relevant threshold to be able to join the cash basis, and

  2. where the person is within

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