Income Tax Schemes For Small Businesses

From the tax year starting on 6th April 2013, the HMRC have introduced two simpler income tax schemes in an effort to improve the tax return process, making it easier for small businesses to manage their income tax obligations.

Cash Basis 

The cash basis scheme allows self-employed businesses, such as sole traders and partnerships, to calculate their income and expenses when completing the self-assessment tax return. The purpose of the scheme is to accommodate smaller businesses and their cash flow circumstances. They are not expected to pay income on money that hasn’t yet been received during the tax year.

If the company is registered on the cash basis account and grows during the same tax year, owners can remain within the scheme until it reaches a total business income of £164,000 per year. Any business that exceeds that amount will be required to use traditional accounting for the following tax return.

Take note that the cash basis scheme is only applicable to certain businesses that fall under their requirements. The HMRC website gives a list of businesses that are not eligible for the scheme. The list includes businesses that have claimed business premises renovation allowance and farming businesses with a current herd basis election.

The cash basis scheme can also be used in coherence with the simplified expenses scheme or flat rate deductions.

Simplified Expenses 

Simplified expenses scheme is another option for tax return. This is again set up for self-employed businesses that can use fixed rates to calculate how much they can claim for certain business expenses when both business and private use is applied.

The reason why this scheme was set up is to make calculating certain expenses simpler. Previously, companies were required to calculate the exact business-use proportion. The scheme is optional and an alternative to traditional accounting. It is available to business owners who feel their accounting could benefit from simplicity.

Companies can use the flat rate for business costs on vehicles, working from home or living on the business premises (i.e. B&B). To qualify for home use expenses, owners must work at home for at least 25 hours per month. The vehicle expenses can be claimed for the mileage. However, the actual buying and running of the vehicle, such as insurance and servicing is not included in the simplified expenses scheme.

Both schemes are optional and are an alternative to traditional accounting. The schemes exclude limited companies and limited liability partnerships. If you would like to learn more about cash basis and simplified expenses accounting, or if you would like to find out whether your business is eligible and can benefit from the two schemes, contact an accountant today.

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