If you own a small business or startup, you don’t have to worry about the tax implications as HMRC has introduced income tax schemes for small businesses for their ease.
HMRC has divided the income tax schemes into two parts: cash basis and simplified expense. These schemes are introduced to aid small businesses in managing their tax obligations and to provide them with their tax rights.
What is a Cash Basis Scheme?
A cash basis scheme is designed, especially, for self-employed personal including sole traders and partnerships. It is the process to calculate the income and expenses after fulfilling a Self Assessment tax return.
Who Qualifies for a Cash Basis Scheme?
To make sure you’re a small business, HMRC has made a threshold for self-employed businesses that their annual income should be up to £150,000.
If your annual income exceeds this limit, you’re eligible for a cash basis scheme for the rest of the tax year, but if it exceeds £ 300,000 you are not eligible, whether you own a single business or more. Above this threshold, you have to opt for traditional accounting methods for your calculations.
This scheme is not applicable to limited companies and limited liability partnerships. For more details, you can visit this link to know who’s not eligible for the cash basis scheme.
How Does the Cash Basis Scheme Work?
In this scheme, you are given a choice to record your income and expenses on a cash base or the traditional accounting method. Cash basis is the way to record your incomings and outgoings of your business whether it’s cash, cheque, or card payment. On the other hand, the traditional accounting method deals with recording your income and expenses by the date you are invoiced or billed. The traditional accounting method works on an accrual basis.
Why is Cash Basis Accounting for Small Businesses?
A cash basis accounting scheme is best suitable for small businesses as here you only have to declare what comes in and goes out of your business in an accounting period.
It is better to show the cash flow circumstances of your business. As a result, you are exempted from the tax out of the money you didn’t receive in a tax year.
While sending a Self Assessment Return, you have to mark ‘cash basis’ on the form to select this scheme.
What are the Simplified Expenses?
‘Simplified expenses are a simple way of calculating common types of business expenses using a fixed rate.
Sole traders and business partnerships can avail of this scheme. It is only available for those whose business and private use is mixed. Limited companies and business partnerships (involving a limited company) are not eligible to use simplified expenses.
Who Qualifies for Simplified Expenses?
You can qualify for Simplified expenses in the below categories:
1. Vehicle or Mileage Expense:
You can claim business mileage allowance based on your total mileage expense like insurance, fuel, repair, and servicing. It is applicable to cars, good vehicles, and motorcycles.
2. Using your Business Premises as Home:
You can use a flat rate to cover some costs and claim the rest as business expenses.
3. Working from Home:
You can claim a flat rate for hours you spent working from home. It is only applicable if you are working for 25 hours or more every month.
You can use simplified expenses to know what you can claim through this and what you can claim by the actual method. Simplified expenses checker will help you to evaluate if it’s a better option for your business or not.
How to Calculate Simplified Expenses?
- First, you need to make sure that you are keeping records of your business vehicles, hours you spent working from home, and how many people were living in the business property in an accounting year.
- At the end of the accounting year, apply a flat rate for vehicle mileage, work from home, and the time you lived in your business premises.
- At last, add these amounts to the total of your expenses in the Self Assessment tax returns.
We hope that you have got detailed information about the income tax schemes for small businesses. You should note that both cash basis and simplified expenses are optional. You should use them considering their worth for your business. Seek help from our accountants for expert advice!