Many more small businesses can now use the simplified cash basis of calculating profits following a big increase to the entry limit.
For property letting businesses, the cash basis has become the standard method for individuals, unless the landlord opts out or has rental income above the threshold.
Under the cash basis, a business records income when it is received and outgoings when they are paid. You therefore do not pay tax on income you have not received or account for amounts you owe, trading stock or work in progress. And the accounting is generally much easier.
From 6 April 2017, the cash basis will be available to self-employed individuals (and partnerships of individuals) with annual turnover up to £150,000. Previously, small businesses could only use the cash basis if their turnover was below the VAT registration threshold – £85,000 in 2017/18.
The cash basis will not suit some businesses, even if their turnover is below the threshold. If you need to obtain finance, a lender will probably want to see a profit and loss account, which provides a fuller and more accurate picture of the business. Loss relief against other income of the same or previous year is not allowed under the cash basis, and interest on cash borrowing for a trade is only allowable up to £500.
If you buy business equipment, such as a computer or a van, under the cash basis you simply deduct the full cost when you pay for it. The exception is cars, for which you can claim a writing down allowance of 8% or 18% depending on the car’s CO2 emissions. Alternatively, you can use simplified expenses for all your business vehicle costs, whereby you record your business miles and claim a flat rate of 45p per mile for the first 10,000 miles and 25p thereafter.
Landlords who opt out of the cash basis must do so for their rental business as a whole – it isn’t possible on a property by property basis. However, they can elect separately for their UK and overseas property businesses.
Loan interest on property letting may be restricted to the extent that the value of outstanding loans exceeds the value of let properties. And in 2017/18 you can only deduct 75% of finance costs from rental income. The remaining 25% is relieved by means of a basic rate tax reduction.
If you think you may be affected, please get in touch.