Wednesday, 20 March 2013

TSCB 13: new Cash Accounting rules 1: Background

Hello! and welcome back.  I know it's been a long time coming, but the Tax for Small Crafting Businesses is now back up & running. What forced me into it? The new changes for small businesses with the new Cash Accounting rules.

In case you're wondering, I've skipped past TSCB 12 - on complex Stock situations (part 2) to concentrate on the new rules.  I'll go back and finish it later on.

Here we go:

As it’s Budget Day today, I thought I’d give you a heads up about the new Cash Accounting rules.  As you know from my previous blog posts in this Tax for Small Crafting Businesses series, all businesses should be using the Accruals Basis.  And as I know from some of the responses I’ve had from you, dear readers, the nuts & bolts of how that works came as a nasty shock to some of you!

This article is going to give the background of why these changes are coming in, and a bit about the key features.  Future articles will explain a bit more about what’s involved and the pitfalls to avoid in deciding whether or not to stick with the current Accruals Basis or move to the new Cash Accounting.

STOP PRESS: The Budget documents have now been released, and whilst the new rules have the green light, some changes have been made.  Have a look at the next article TSCB14 for the updated position as they've moved the goalposts a bit! (Update 20 March 2013 13:49)

The pictures today are sneak previews of products that I've got in development for TootHillMedley.  This first one, individual picnic blankets - don't you hate having your feet near the food or your back to everyone?  The inspiration comes from the EM Forster book Room With a View where they use Gaberdine Squares on damp ground.


The answer to that - well, yes and no.

Way back in the late 1990s Self Assessment for UK Tax was brought in.

Before that, businesses who’d been long established could use the ‘old’ form of cash accounting (which mostly determined the timing of when your profits got taxed and is a totally different animal to the new Cash Accounting rules, so don’t get them mixed up!) although most businesses had moved onto some form of Accruals Basis in one way or another by then.

With Self Assessment, all businesses, no matter how small, totally utterly and absolutely had a legal obligation to use the Accruals Basis and to get it right for themselves under the change to Self Assessment, with one exception. 

The only people who were allowed to carry on using the old cash accounting basis after Self Assessment arrived in 1998 were barristers, everyone else had to move onto the Accruals Basis.

I find the whole Barristers exception quite interesting  -  it only lasts for their first 7 years of trading.  Why? Because traditionally (we’re talking mediaeval times here) barristers had to take all work offered and were not allowed to decline it for any reason.  As such in effect they couldn’t set their own rates - they were paid the amount that clients felt was appropriate/could afford – the client not the barrister decided how much the work was worth.

Winding on a few hundred years, in the 19th century barristers did start issuing invoices and setting prices for their work, but still couldn’t sue clients for the monies owed to them.  So human nature being what it is, clients tended to pay very slowly, if at all, and as a result, barristers, having enormous cash flow problems through slow payers, were allowed to stay on the old cash basis until they got established.

Barristers can now sue for monies owed (since 2007) but that anomaly over the old cash basis remains.  Let me repeat: the new Cash Accounting is nothing like the old cash basis that new barristers can use. Don’t get confused and mix them up!  But I digress….

This is a greetings card inspired by a tiny motif forming part of the ornamental bed head at the Peggy Guggenheim Museum in Venice.  Handmade paper (not by me) 'slashed' by scalpel to show the underlayer of gold.  Sumptuous!  


So, back to today, March 2013, and issues that concern us all personally.  So, I hear you ask, why the changes?

Well, in 2010 the government recognised that the UK tax system was creaking at the seams and created a new body called the Office of Tax Simplification to have a look and chop out some dead wood:  which they’ve been doing quite successfully.  The OTS is a mix of government officials, and tax professionals, amongst others, whose job is to find tax-related logjams and recommend ways to fix them.

One of the areas they looked at was tax & red tape for small businesses.  They reported back to the Treasury in March 2011.

By March 2012, with last year's Budget Day, the Treasury & HMRC made their initial proposals and since then consultations have been made with the wider public, and draft legislation and guidance notes have been published, and amended at least once.


Where are we now?  There may be changes to the proposals in this Budget Day today, but otherwise, there will now be a choice for small businesses to use the new Cash Accounting or the existing Accruals Basis on an annual basis for the 2013/2014 tax year.

However the elephant in this particular room is – how do you know which is best for your business? Because the devil is most certainly in the detail!
This is going to be a series of cards with words inspired by the handpainted backgrounds.


If you’ve read my TSCB articles, then you already know about the existing Accruals Basis, because that’s what those articles are based on.

In summary the Accruals Basis, also called the ‘True & Fair Basis’, requires businesses to make adjustments to their basic cash (money in & money out) position to reach their accounting & tax position – for

  •  income earned but not yet received,
  • expenses paid for but not yet used (prepayments),
  • and expenses used but not yet paid for (accruals) as well as for
  • stock & work in progress,
  • distinction between private & business use  and last but not least
  • capital expenditure (capital allowances).
It’s important to understand that the Accruals Basis is the DEFAULT position for your business.

If you don’t actively elect (by ticking the box) in your tax return each year for this new Cash Accounting, then you can’t use it.

And if HMRC find out you’re not doing what you should be, in the words of the song “…there will be trouble ahead…” and the only moonlight and dancing you’ll be seeing may be from behind bars!


It’s also important to understand that you make this choice each tax year.  Which means you have to think about it each year.

Which means that, in effect, you need to be keeping records which comply with the existing Accruals Basis and not just the allegedly more simple new Cash Accounting, in case you don’t want to make the election that year.

HMRC are really gearing up to checking business records and following up where they think or suspect the tax rules aren’t being followed.  If you choose not to keep appropriate records, there are penalties if HMRC catch up with you.

I love unusual card forms, and this one lends itself very well to cutting up commercial scrap-booking pages - but they'll be limited editions as I don't have many of each sheet!


At it’s most simple, the new Cash Accounting system allows you to use
  1. Cash accounting for income & expenses – that’s money in & money out, no more faffing around with accruals & prepayments, creditors & debtors and stock calculations, although you still have to follow some rules, such as those on including the value of bartering and disallowing entertaining etc expenses, and
  2. fixed rate deductions for:
  •  motor vehicles
  • use of home as office
  • private use of business premises instead of working it all out.


Anyone whose total receipts is less than the VAT registration threshold (currently £77,000).

Plus anyone in receipt of Universal Credit (the new benefits system) whose total receipts are less than twice the VAT threshold (currently £144,000).

If a business is registered for VAT, then the total receipts includes the VAT figure.

Anyone whose receipts exceed twice the current VAT threshold, must move to the existing Accruals Basis and can't use the new Cash Accounting.

There'll be machine embroidered fused plastic wall art


In theory the accounting is easier to do, no more worrying about complex rules more suitable to large international businesses.

And where a business holds stock (as we crafting businesses do) there’s a cash flow advantage because so long as you owe less money to others than they owe to you plus the value of your stock in hand, you’ll claim expenses sooner, and therefore get tax relief on them sooner (at the moment you have to wait for your stock to sell before claiming the underlying costs as an expense – which can take a long time in the craft world!)

If you’re already doing a form of cash basis, then the new Cash Accounting regularises your position.  Which should help you sleep at night!


Why wouldn’t you want to use it? It sounds fabby!

Yes it does doesn’t it.  In theory the only accounting books you will need are your bank statements (including paypal) and to keep a note of your mileage.

In practice, it’s not as easy as it sounds accounting wise, and some of the fixed rate allowances are very low and may give you a higher tax hit than the existing Accruals Basis.

Also, most businesses even teeny tiny weeny ones are likely to need to know more about their business than how much money they have in the bank – we need to know our stock levels, how much cash is tied up & for how long etc, and the existing Accruals Basis is a good way of keeping track of that.


In addition, there’s some nasty stings in the tail:
  1. Losses: If you choose the new Cash Accounting and you make losses, those losses have to be carried forwards against future profits in that business.

    Under the existing Accruals Basis, you can offset those losses against your other taxable income for the year (called ‘sideways losses’ – that is assuming HMRC haven’t classed you as a hobby business and denied you such loss relief which they can do if you trade at a loss for more than the first 5 years of trading.
  2. Capital Allowances: You won’t get capital allowances.

    I’ve not covered these in the TSCB series yet, but basically, if you buy a business asset that’s capital, under the Accruals Basis you can’t just claim the whole cost, you claim part of the cost year on year until the initial purchase value has all been claimed (over a couple of decades depending on the asset).

    Under the new Cash Accounting you don’t need capital allowances, because you get a straight immediate deduction as an expense (therefore a cashflow advantage). 

    But, not for motor vehicles. With those you get the fixed rate deduction mentioned above – and when you switch between the new Cash Accounting and the existing Accruals basis, it’s easy for anything that’s not a motor vehicle, you can’t have tax relief twice, but for vehicles, you are stuck with the fixed rate deduction once you’ve made that first new Cash Accounting election in your tax return, until you sell that vehicle.

  3.  Interest on Loan Finance: You won’t get any tax relief for interest on loans for your business under the new Cash Accounting over & above a nominal £500 per year.

  4. Accounting Dates: You can’t choose your accounting date (see the TSCB article for how it can be beneficial to do this under the existing Accruals Basis).

    You have to calculate your figures to a date between 31 March to 5 April each year.  If you’ve got a different accounting date, you’ll need to change it and there’s rules for doing that, if you move to the new Cash Accounting.

    But if you are thinking of switching between the new Cash Accounting & the existing Accruals basis, that inflexibility for your accounting date may make an huge difference not just in the timing of when income & expenses are counted for tax, but also in your cashflow.
Quite a lot to think about there!

Cushion covers or individual picnic blankets - can't quite decide!

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None of the products featured above are currently for sale: but these below can be bought from my Etsy or Folksy shops.

Lois Addy
Toot Hill Medley

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