Simplified cash basis expenditure

Produced by Tolley

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

  • Simplified cash basis expenditure
  • General calculation of profit
  • Cash basis ― wholly and exclusively
  • Personal use
  • Simplified cash basis and treatment of capital expenditure
  • Capital items acquired before 2017/18
  • Existing plant and machinery and electing into the simplified cash basis
  • Simplified cash basis and cash receipts
  • Ceasing to use an asset for business purposes
  • Interest payments on loans
  • More...

Simplified cash basis expenditure

The simplified cash basis provides asimpler way for smaller businesses to calculate their taxable profits, which is based on receipts less payments subject to any adjustments required for tax rules. This guidance note details the calculation of profit, for details on the eligibility of abusiness to use the simplified cash basis, see the Eligibility for the simplified cash basis guidance note and for asummary of the consequences of joining or leaving the simplified cash basis, see the Simplified cash basis ― joining and leaving guidance note.

General calculation of profit

Under the cash basis, there is asimple two-step calculation:

  1. cash receipts actually received, less

  2. cash expenses actually paid

ITTOIA 2005, s 31E

In addition to this, the removal of the requirement for generally accepted accounting practice (GAAP) treatment provides asimplification of the accounting treatment. Consequently, it is not possible to receive deductions for accruals or provisions. This removes the requirement for abusiness to compute certain figures such as:

  1. debtors

  2. creditors

  3. stock

  4. capital expenses, and

  5. capital allowances

ITTOIA 2005, ss 25, 28–33

In addition, under the simplified cash basis, there is no statutory relief for bad debts or employee remuneration accruals.

The alteration to the treatment of capital expenses and receipts remove areas of complication; however, some of the well-understood principles derived from case law are retained such as expenditure being wholly and exclusively for the purpose of the trade.

For asummary of which provisions of ITTOIA 2005 are disapplied under the simplified cash basis and which provisions have been introduced, see Summary ― simplified cash basis for smaller businesses.

Cash basis ― wholly and exclusively

The simplified cash basis states that expenditure must be incurred ‘wholly and exclusively’ for the purposes of the trade. This means that expenditure with personal use or other non-business use is disallowed. See below, however, regarding the deduction for loan interest. For afull review of what wholly and exclusively means, see the Wholly and exclusively guidance note.

Personal use

Where expenses

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