Cash Basis of Accounting

Question 1

default taxable method for 24/25?

Answer 1

cash basis

Question 2

can an election be made to use accruals basis?

Answer 2

yes

the election will then apply to future years until further notice

Question 3

under cash basis, tax adjusted trading profits are calculated as…

Answer 3

total cash receipts less total allowable business expenses paid

Question 4

how do you adjust for cash basis?

Answer 4

adjust final figure in accounts for tax purposes

Question 5

items which are treated differently under the cash basis?

Answer 5

• when owner takes goods for personal use, a ‘just & reasonable’ amount should be added to trading profits
• amounts received from the sale of plant/machinery (except cars) are classed as taxable trading receipts
• if trader ceases to use capital asset for trade, the MV of the asset at that date is treated as taxable receipt
• if trader ceases trading, inventory is treated as a taxable receipt

Question 6

only business proportion of expenses are allowable as normal, except for…

Answer 6

• payments to buy plant & machinery (except cars), no cap allowances available on these purchases
• if plant & machinery is bought under a hire purchase, a deduction is allowed for each payment
• for leased cars, 15% disallowance doesn’t apply

Question 7

on cash basis, is there a 15% disallowance for pollutant cars?

Answer 7

no

Question 8

entertaining customers is…

Answer 8

disallowable

Question 9

for cars, if the fixed rate mileage allowance has previously been claimed (under accruals basis)…

Answer 9

then it must continue to be used under the cash basis

Question 10

in the first year of using the cash basis, what happens?

Answer 10

a cash basis deduction occurs

this is a deduction made for the proportion of any TWDV on capital allowance pools which relate to plant & machinery (not cars)

Question 11

under what condition will capital allowances continue being claimed on cars?

Answer 11

unless fixed rate mileage allowance is being used

Question 12

how is double counting of income/expenditure avoided?

Answer 12

a net adjustment income/expenditure figure is added to/deducted from profits

e.g., opening debtors + opening stock - opening creditors = adjustment expense/income

Question 13

from 24/25, the default method is…

Answer 13

cash basis

Question 14

can a trader elect to use accruals basis?

Answer 14

yes

the election will apply from the tax year it is made and future years

Question 15

if a trader leaves the cash basis…

Answer 15

any unrelieved expenditure on plant & machinery must be allocated to a capital allowances pool in the next period

this only applies where an asset has been acquired, but not fully paid for

Question 16

what happens to the proceeds when a capital asset is sold under cash basis?

Answer 16

the proceeds will increase trading profit

this applies even if the cash basis was no longer made available applies

(provided the expenditure was originally deducted under cash basis)

Question 17

when ceasing to use the cash basis, net adjustment income/expenditure must be accounted for by…

Answer 17

• an adjustment expense is deductible in full in the first accounting period after leaving the cash basis
• adjustment income is spread equally over 6 years & taxed in 6 tax years (trader can elect to tax this sooner)

Question 18

impact of cash basis on partnerships?

Answer 18

if a partnership uses cash basis, no partner can deduct from total income the interest paid on a loan to invest in the partnership or buy plant & machinery

Question 19

impact of cash basis on CGT?

Answer 19

as proceeds from sale of plant & machinery are taxable as trading receipts under cash basis, they’re exempt from CGT

Question 20

impact of cash basis on VAT?

Answer 20

if a trader using cash basis is registered for VAT, the VAT cash accounting scheme must be used

Question 21

impact of cash basis on NICs?

Answer 21

when calculating class 4 NICs, a cash basis trader should use tax adjusted profits as calculated under cash basis

Question 22

amounts received from the sale of plant & machinery are…

Answer 22

treated as taxable trading receipts

except for cars

Question 23

if a trader ceases to use a capital asset for trade…

Answer 23

the MV of the asset at that date is treated as a taxable receipt

e.g., if owner starts using it privately

Question 24

if trader ceases to trade…

Answer 24

the MV of inventory is treated as a taxable trading receipt in final period

Question 25

payments to buy plant and machinery - are they allowable expenses?

Answer 25

yes, under cash basis except for cars

Question 26

how is a car purchased under a hire agreement treated?

Answer 26

deduction is allowed for each payment for the hire

Question 27

is capital expenditure on non-depreciating assets allowable?

Answer 27

no

Question 28

can you claim the fixed rate mileage allowance on cars?

Answer 28

yes or you can claim capital allowances you can't do both

Question 29

does the 15% restriction for pollutant cars apply under cash basis?

Answer 29

no

Question 30

do bad debts exist under cash basis?

Answer 30

no, as income is only taxed when received

Question 31

when the owner takes good out under cash basis, what amount is added to trading profits?

Answer 31

a 'just and reasonable' amount e.g., the cost of the stock as long as it's done at arm's length

Question 32

basics of moving from accruals basis to cash basis?

Answer 32

avoid double taxing, so net adjustments are made plant & machinery (except cars) are treated as expenses

Question 33

basics of moving from cash basis to accruals basis?

Answer 33

plant & machinery which was to be expensed should be moved to a capital allowances pool

Question 34

under cash basis, when a capital asset is sold, what happens?

Answer 34

the proceeds increase trading profits

Question 35

when going from cash basis to accruals, what adjustment is made to income/expenditure?

Answer 35

adjustment expense is deductible in full in first year adjustment income is spread equally over 6 years