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Limited Company

Sole Trader: Cash Accounting and Simplified Expenses

A new cash basis for calculating taxable income for small unincorporated businesses was introduced in April 2013.

 

The first measure allows qualifying small businesses to calculate their profit and loss based on cash received and paid during the financial year, as opposed to applying accounting principles.

 

Businesses will not have to compute figures of debtors, creditors and stock, or distinguish between ‘capital’ and ‘revenue’ expenditure. The will not have to compute capital allowances.

 

The second measure allows all unincorporated businesses to choose to use flat rate expenses for particular items of business expenditure.

 

The key aspects of the cash basis are that:

  • it is an optional scheme

  • businesses can enter the cash basis if their receipts for the year are less than the amount of the VAT registration threshold (currently £85,000). Businesses must leave the cash basis after their receipts exceed twice the amount of the VAT registration threshold (currently £170,000)

  • allowable expenses must be amounts paid wholly and exclusively for the purposes of the trade. Interest payments are also allowed up to a limit of £500

  • business losses may be carried forward to set against the profits of future years but not carried back or offset ‘sideways’ against other sources of income

 

Simplified expenses

 

Simplified expenses are based on ‘easier to follow’ rules that can be used when calculating some business expenses. These simplified expenses are all optional. They are:

 

  • fixed allowances for business mileage

 

The rates per business mile that can be claimed are:

 

VehicleFlat rate per business mile:

 

  • cars and goods vehicles first 10,000 miles45p

  • cars and goods vehicles after 10,000 miles25p

 

Motorcycles24p:

 

The flat rate covers the costs of buying, running and maintaining the vehicle, such as fuel, oil, servicing, repairs, insurance, vehicle excise duty and MOT. The rate also covers depreciation of the vehicle.

 

The mileage rate does not include incidental expenses incurred in connection with a particular journey, such as tolls, congestion charges and parking fees. These will be allowable as a deduction where they are incurred solely for business purposes.

 

Alternatively, the unincorporated business may choose to claim actual costs. The business may add up the total costs of running the car for the year (service, fuel, road tax, insurance etc) and then do the pro-rata calculation based on business / non-business miles for the year (will need a detailed travel log in any event).

 

  • a flat rate to calculate expenses relating to business use of the home

 

You can only use simplified expenses if you work for 25 hours or more a month from home.

 

Hours of business use per month                                                                        Flat rate per month

25 to 50                                                                                                                     £10

51 to 100                                                                                                                   £18

101 and more                                                                                                           £26 

 

It may be advantageous to claim the incremental costs of working from home – calculated based on the hours of work from home.

 

The flat rate doesn’t include telephone or internet expenses. You can claim the business proportion of these bills by working out the actual costs.

 

Simplified expenses can be used by any unincorporated business, whether or not they have already chosen to use the cash basis.

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