Simplified cash basis ― joining and leaving

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 ― joining and leaving
  • Joining the cash basis
  • Leaving the cash basis
  • Summary

Simplified cash basis ― joining and leaving

The Eligibility for the simplified cash basis guidance note explains the criteria to be able to use the cash basis and the Simplified cash basis expenditure guidance note explains the treatment of expenditure. This note explains the consequences of joining and leaving the cash basis.

Joining the cash basis

On joining the cash basis, transitional adjustments may be required to ensure that income is not taxed twice and that expenditure is only relieved once. For example, if an expense was included in advance of its payment in the final profits calculated under the accruals basis (ie under generally accepted accounting practice (GAAP), see the Adjustment of profits ― overview guidance note), it cannot also be deducted as an expense if it is actually paid in the first period in which profits are calculated under the cash basis.

If the business has previously calculated profits on the accruals basis, receipts in the first year calculated under the cash may include amounts received from customers who had not settled their debts by the end of the previous tax year (debtors). Similarly, payments the business makes to its suppliers in the cash basis period may include amounts owed for purchases made in the previous tax year.

Transitional adjustments may be required in the first year of cash basis calculation for these (see Example 1 and Example 2) and also for the following, if they apply:

  1. trading stock was held at the end of the previous tax year, see Example 3

  2. other accrued expenses, prepayments or income received in advance were included in the profits of the previous year, see Example 4, Example 5 and Example 6

  3. the business uses a finance leased asset (see below)

  4. capital allowances were claimed in the previous year (see below)

  5. equipment has been bought on hire purchase, see Example 7

  6. the business is VAT-registered and

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