Friday, 22 March 2013

TSCB 14: new Cash Accounting Rules 2: Ch.. ch.. ch.. ch.. changes!

I feel it's appropriate that I wrote this blog article to the strains of David Bowie's 'Changes'.  Not so great that I listened to it so often that it's now an earworm, but less about my struggles controlling the repeat function in iTunes...

Two days ago I posted TSCB13: the Background to the new Cash Accounting rules here.  At morning coffee time.  As soon as the Chancellor sat down after giving his Budget speech, HMRC & the Treasury released forests of paperwork giving the details behind the speech.  Slightly unexpectedly, a few of the trees in that forest made changes to the new Cash Accounting rules. Quite significant ones.

So this article tells you what the changes are and how they differ from the original proposals for the new Cash Accounting rules and from the existing Accruals Basis.

Today's Featured Seller is BigBlueBed (Alix) - she sells on Etsy here (where you can find this tweed broaoch), and Folksy here. And you can find out what she's up to on her Facebook page here


More than I expected, given the lengthy process they went through to get it to the earlier proposals I talked about in my first Cash Accounting article!  The good news is that most of the changes are a direct result of further consultation and are designed to make this new regime more attractive to the businesses that can use it.


Change 1 – Mileage expense claims

Originally the proposed new rules said that, once you elected to use the new Cash Accounting regime, then even if you moved back to the existing Accruals Basis, you’d still have to use the mandatory method of getting tax relief on motor expenses through a fixed mileage rate for as long as you own that vehicle.

There was a lot of concern that the majority of ‘white-van-man’ type businesses would find the existing Accruals Basis (where you can choose between claiming the business element of all the actual costs incurred, or the fixed mileage rate) much more attractive than the new Cash Accounting – the government’s taken that concern on board, and changed the proposals.  Yay them!

The revised Cash Accounting basis now gives you the same choices as the Accruals Basis does – you choose whether you claim the actual cost of expenses or the fixed rate for mileage for your motoring expenses.

But you do have to be consistent and stick to what you've chosen unless there's good commercial reasons (like you changed your car, or your business mileage has changed so significantly that the other alternative gives a more 'true & fair' view of what's happening in reality).

It's a 'pocket pig' - tiny little pig to put in your pocket.  Seriously cute!

Change 2 – Dealing with business goods taken for own use

We all do it.  We make stock, then we give some of our products away or barter them.  And some of us don’t even consider if there’s any tax implications for doing that.  There are, and in HMRC-speak it’s called ‘business goods taken for own use’.

Under the existing Accruals Basis, (as explained earlier in the series in TSCB6 here - I called it Appropriations, it's just underneath the fourth picture in that post - see I knew pics would be useful as well as beautiful!) you have to include the full retail price of whatever you’ve given away as income.  

Then if you’re using HMRC’s method to calculate the stock expense you automatically get relief for the underlying raw materials contained in the gifted item.  

The net effect for your business is that you end up paying tax on the value of the difference between the retail value you’ve not received and the raw materials you’ve paid for.  

Bartering is similar but with a twist – you have to include the value of the goods you’ve received on the swop into your calculations. (That's covered a bit higher up in TSCB6 just underneath the second picture).

Originally, the new Cash Accounting rules were going to be pretty much the same as the existing Accruals Basis.

But concerns were raised that it was going to be too complicated for people to get it right, particularly because you don’t even have a stock expense calculation to do, so under the new rules so it’s easy to forget to make the adjustment.  Also, it’s a bit harsh to make small businesses pay tax on money they've not actually received (which is what happens if you apply the Accruals rules).  The government saw sense and altered the new rules.

The revised Cash Accounting basis will allow you to provide for ‘an adjustment on a ‘just & reasonable’ basis where an individual takes business goods for their own use.  

What’s reasonable?  Well it's what's an HMRC official would consider reasonable in the context of the size of your own business within your particular trade if they ever asked.

Personally, I’d say that if you’re claiming the underlying raw materials of the gift as an expense, then when you make the gift, you’d include the value of those raw materials as an income adjustment.  That would make your position tax neutral – in effect you’d be not getting tax relief on the actual costs involved in what you've given away. 

For completeness, the short-cut which gets you to the same answer in a different way: is to not claim the underlying raw materials expenses contained in the gift or barter in the first place, then you don’t need any income adjustment to make it tax neutral.  

Would I recommend that short-cut approach? Not really, because then it’s not easy to see afterwards how you dealt with the value underlying the gifts, showing the adjustment gives you a papertrail and proves you've thought about it – and that’s a valuable bit of evidence if HMRC did ever come asking to see your records, because they prefer to be able to see what’s happened in your business.

One of Alix's key products is Dorset Buttons: and using them creatively

Change 3: You can't swop annually between the new Cash Accounting and the existing Accruals Basis any more

This particular goalpost has been moved all over the playing field since the whole simplification idea was first mooted.  Eventually it was decided that people would be free to choose each tax year whether they were going to be on the new Cash Accounting or the existing Accruals Basis and that's how the initial draft legislation was done in December 2012.

But concerns were raised that if you could do that, then you’d need to keep full records under the Accruals Basis to be able to make that swop, so why bother with the simplified in the first place, it wouldn’t reduce the admin burden/ red tape on small businesses.  

Also, there was potential for people to arrange their business so that they could get a tax advantage by accelerating expenses incurred, and income receipts.

In recent weeks, official statistics have been released that show that the expected tax receipts arising from the 50% tax rate introduced by the coalition government were lower than expected - because rich taxpayers accelerated their expenses and income.

So, despite the small values that any such faffing around represents for individual businesses, because it could add up to significant sums of tax lost over the whole small business population, and also would be against public policy on tax avoidance, the government decided it would encourage people to behave badly, so they've changed it.

The revised Cash Accounting basis now stops you from swopping between the new rules and the Accruals Basis.  

It’s a one time election to move onto the Cash Accounting, and you stay on it until your business circumstances change.  You’ll only be able to move back onto the existing Accruals Basis if you have genuine commercial reasons for doing so.

What would those 'genuine commercial reasons' be then? I’ve no idea, they’ve not made that public.  Though I imagine the key one would be reaching the turnover thresholds discussed in TSCB13, my first post on Cash Accounting.

But it does raise the stakes – moving onto the new Cash Accounting basis without thinking it through first could be a mistake if you find yourself trapped there.

 A tweed flower brooch

Change 4:  Choosing your own Accounting Date

Under the existing Accruals Basis you are allowed to choose your own year end date (TSCB3: Tax planning with year ends here) - though it's not for the faint hearted!

Over the life of your business it doesn’t matter what date you choose, all businesses end up paying the same amount of tax (assuming they had identical profits) as each other, the difference is the timing of when they pay that tax.  The closer the year end is to the 5 April end of the tax year (say 31 March) the sooner you pay tax on your profits, the further away it is (say 30 April) the later you pay tax on your profits.  

It’s all a matter of cashflow. And in some businesses cashflow really matters.  It’s legitimate tax planning and recognised as such by HMRC (if not encouraged).

Originally, all businesses electing for the new Cash Accounting would have to move their year end to the end of the tax year 5 April (actually any of the 6 days from 31 March to 5 April is deemed to be as good as dammit there, for convenience).

Again there were concerns – because on the Accruals Basis you can choose your own year end, but there’s rules to stop that being tax–effective if you do it more than once every 5 years.  So the question was, how does that work if you can swop between the two?  And doesn't that give people an unfair tax advantage because it changes when the tax will be due?   Isn't that sometimes seen as tax avoidance? 

Also, if you’re aiming to simplify tax for the small business, why on earth would you make them change their year end, because then every single one of them that doesn’t already have a March 31 year end will have to make a one-off adjustment to their profits that can be a bit complicated and may mean they pay more tax or less tax now just because of a rule change, not because of their actual business circumstances!

The government listened, and I imagine the whole change from swopping between them to staying with one of the regimes and this relaxation over choosing your year end go hand in hand.  Together they make it much simpler, and small business owners are relieved of the worry of whether they've jumped the right way every time they file a tax return.
Tweed shoe clips

So that's it, those are the 4 changes.  For some businesses they'll make a difference to whether you choose the new Cash Accounting, for others they won't.  It's up to you to decide for yourself.

So, what's next? articles on:

  • where that leaves us now, what does the existing Accruals and the new revised Cash Accounting look like?
  • what are the issues to consider when deciding, because the above changes affect what I said in the first article?, and
  • how does that change what I need to put on the tax return (including that old chestnut of '3 line accounting'.
BigBlueBed (Alix) - sells on Etsy here (where you can find this tweed broaoch), and Folksy here. And you can find out what she's up to on her Facebook page here

True fact: BigBlueBed was asked to provide bespoke handmade Dorset Buttons for the recent Les Miserables film!

Whilst you're waiting for those articles, anyone who's interested can have a look at the HMRC Budget Day Tax Information and Impact Note on the Cash Accounting proposals here.

What I find most interesting about that TII Note, is that it's totally clear that:
  • on the first page in the Background the Office of Tax Simplification 'found that small businesses are concerned about the difficulty and uncertainty involved in preparing a taxable income figure'.... and as a result the government announced 'it will introduce a new cash basis for calculating profits for small unincorporated businesses'.
  • on the second page in the Detailed Proposal: Current Law section, it's made totally clear (although they don't use the actual words 'Accruals Basis') that right now, there is NO cash basis available in law unless you're a barrister -per my first article on this subject.  
Yes, I appreciate HMRC might be flexible in practice, but as the OTS noted, you can't be certain in the unlikely event that HMRC do come have a chat with you about what you're doing now or have done in the past, that you can negotiate your way out of trouble.  

You are of course, totally at liberty to do what you want in your own business, I won't be offended if you disagree!

My view is, if you stick within the law you can't go far wrong.  So if you're looking for shortcuts and workarounds, my blog is not the place to find them!  I'll tell you if there's grey areas, or if HMRC have publicly published a relaxation of the rules, but otherwise, I'm not going there!

I also found it interesting that HMRC are changing the rules for Barristers - from now on they are like everyone else, they have to choose Cash Accounting (until they hit the same thresholds) or the full Accruals Basis.

On the big picture level, I know that HMRC are actively tightening up on small businesses - they've had amnesties for plumbers, online traders, teachers etc, and they also specifically target groups of people with 'sidelines' that might not be declared.  Even for people you think wouldn't matter - like those who earn small amounts as organists for weddings & funerals.  

So, in the light of this general trend, my opinion (and it is only my opinion) is that, regardless of what HMRC may or may not have done in the past, as soon as those new rules go live, they won't be giving anybody who should be on the Accruals Basis, or anyone who actively chooses the  Cash Accounting much leeway to bend the rules.  

Obviously anyone who could choose the Cash Accounting but doesn't because they hadn't heard of it, is likely to be treated as though they have made the election, because they're probably not that far outside the new rules.  But I can't see HMRC not pulling a small business up on areas where they're outside the rules once HMRC've put the effort into asking the questions in the first place!  

They can and they will make you put it right, and they'll ask for the unpaid tax and they may impose penalties up to the value of the unpaid tax.  The new rules don't change the consequences of not obeying the law!

Finally, the original Budget Day thread on Folksy has turned into a discussion (for anyone who won't be using the new Cash Accounting) about how to deal with stock expenses on the Accruals Basis. So it's still worth checking out here.

Edited: 23/3/13 @ 16:50: I've just made 2 additional posts on page 2 of that original Folksy thread linked to above (I've renamed it to reflect that it's the pre-Budget Day rules, and that it's mostly a discussion on stock expenses under the Accruals Basis) - these 2 additional posts are a summary of a long (3 hours-ish) conversation I had with my dad about stock expenses, the Accruals Basis and small businesses - in particular to answer questions that people had asked on the thread about the rationale behind why you claim expenses in particular ways.

Why him? Well because he was a Trade Valuer (stock taker) all his working life, retired very recently and was the course writer/ examiner for his professional body The Trade Valuers Institute (which I think is now part of another one, maybe the one for the pub trade.  He's helping my sister wrangle sheep n furniture as she's moving this week and is in off-grid rurality today, so I can't ask him).

But in view of that (being the discussion having moved mostly to the stock expenses under the Accruals Basis area), I've started a new thread specifically for anyone who wants to talk about the Cash Accounting rules here on Folksy.

If you prefer to use Etsy then the thread I started on Cash Accounting is here
And you're more that welcome to come and have a chat on my Facebook page

All are welcome, as are all opinions - all I ask is that you're careful not to potentially mislead people who know less than you do! Particularly when it comes to whether or not you're ever going to be caught if you don't follow my 'strict legal' basis approach.  You're all free to do what you like in your own businesses, you have no obligation at all to take any notice of what I think - but I'm sticking to my 'stay within the law to stay out of trouble' line.  You won't offend me by disagreeing with that, but in threads I've started, I will object if I think anything away from that line has a potential to mislead the unwary!


Suzi Smith said...

really appreciate you taking the time to explain lois x

Goblinf said...

Well I needed to work out what was going on for myself, so once I'd put that effort in, there's not a lot of point in keeping the information to myself. Better to help people who don't know the option's available!

Unknown said...

I've learned something new coming from you bookkeeping budget I agree with that in your details mentioned. Big thanks!

Hen said...

Thanks for these article - I'd spent half a day searching for info on HMRC website about stock control and valuation, then fund your articles - thanks.