ACCA TX ^UK Syllabus B. Income Tax And Nic Liabilities - Cash basis - Notes ^{4 / 8}

the cash basis could only be used where annual revenue was below £150,000, but this restriction has been removed – so the cash basis can now be used by all sole traders and partnerships.

The cash basis has also been made the default method for calculating trading profit. 

In any question involving the calculation of trading profit for a sole trader or partnership, the cash basis is therefore applicable unless the question states otherwise. 

Although a sole trader or partnership can still use the accruals basis to calculate trading profit, they now have to elect if they wish to do so.

Calculation of profit

1. Total cash receipts of the business plus the sale of capital items are included.

   For example If the business sells trading stock worth £25,000 and sells a capital asset worth £50,000, both of these will be included to give a sales figure of £75,000.

2. Total cash expenses of the business including purchase of capital items used for business are deducted.

   For example If the business purchases trading stock worth £25,000 and purchases a capital asset worth £50,000, both of these will be included to give a purchase figure of £75,000.

3. There is an exception of the purchase of motor cars, these will not be included in the calculation of profit under the cash basis. (Vans purchased will be allowable).

   For example, a motor car was purchased for £40,000. Even though this is a capital item, this will not be included in the purchases of the businesses under the cash basis.

Illustration:

Sales for the period were ￡61,000 of which ￡4,000 was still owed by business customers at the end of the period.

Inventory on March 31, amounted to £1,800.

Purchases and expenses of the period (all allowable) amounted to ￡29,000 of which ￡2,000 was still owed to suppliers at the end of the period.

• What is profit according to the normal basis and cash basis?

Solution:

Normal Basis £

Revenues 61,000

Cost of sales (29,000 – 1,800) (27,200)

33,800

Cash Basis £

Receipts (61,000 – 4,000) 57,000

Payments (29,000 – 2,000) 27,000

30,000

The above calculation of profit only includes cash items

therefore things such as: receivables, payables, opening and closing inventory will be ignored. 

The business will only pay income tax on its cash profits.

Simple proforma to use:

Less:

Motor expenses

A business can use HM Revenue and Customs (HMRC) approved mileage allowances to calculate the deduction for business mileage.

This is:

1. For the first 10,000 business miles – 45p/mile

2. For any business miles after 10,000 – 25p/mile

   For example, the motor car that was purchased for £40,000, drove 15,000 business miles. 

   The allowable deduction will be (10,000 miles * 0.45) + (5,000 miles *0.25) = £5,750

   If approved mileage allowances are claimed, the actual running and capital costs of owning a motor car are ignored – so no claim for capital allowances

   If approved mileage allowances are not used, actual running costs and capital allowances are claimed instead. The method to be used will be stated in the question.

Illustration:

Barry commenced a new self employment business on 06/04/2024.

The following information relates to the year ended 05/04/2025:

1. Sales receipts of £81,000 with a further £750 owing on 05/04/2025.

2. Purchase of inventories of £20,000.

3. Closing inventories of £680 at 05/04/2025.

4. On 10/06/2024 Barry purchased a car with C02 emissions of 185g at a cost of £20,000. 

   Barry drove 12,000 business miles and 4,000 private miles. 

   The total motor expenses amounted in £3,600.

5. Ventilation system purchase cost £2,500.

6. Other expenses (allowable) cost £17,600 with a further £400 owed as a payable at 05/04/2025.

7. Note: Under the cash basis, approved mileage allowances are used.

Should Barry elect to enter into the accruals basis scheme?

Solution:

Accruals basis

W1

Cash and credit sales calculation:

• £81,000 + £750 = £81,750

W2

Cost of sales calculation:

• Opening inventory + purchases – closing inventory.

  0 + £20,000 - £680 = £19,320

W3

Motor running expense calculation:

• The motor running expense must be adjusted for business use only, as private expenses are not allowable. 

  £3,600 * 12,000/16,000 = £2,700

W4

Other allowable expenses

• £17,600 + £400 = £18,000

W5

Capital allowance calculation:

• AIA £2,500 (ventilation system)

  WDA £20,000 * 6% = £1,200 * 12,000/16,000 = £900 (car: CO2 >50g/km: special rate pool)

The Cash Basis

Tax adjusted trading profit (Cash basis)

• Cash sales £81,000

  Cash purchases (£20,000)

  Gross profit £61,000

  Cash expenses (£17,600)

  Cash capital expenditure (£2,500)

  AMAP  (£5,000) W1

  Tax adjusted trading profit £35,900

W1

AMAP

• 10,000 miles * 0.45 = £4,500

  2,000 miles * 0.25  = £500

• Barry should NOT choose to elect into the accruals basis scheme as this results in a higher taxable profit for him