Small unincorporated businesses have to choose between several different combinations of accounting methods in order to work out their profits for tax purposes. 

This is a freeview ‘At a glance’ guide to the cash basis v fixed expenses.

At a glance

Two different accounting systems

There are two different ways to prepare a set of unincorporated business accounts in order to arrive at your taxable profits.

  1. 'Simpler accounting' or cash accounting.
  2. Accruals basis accounting. This is accounting following Generally Accepted Accounting Principles (GAAP).

We refer to:

  • 'Simpler accounting' as the 'cash basis'.
  • 'GAAP accounting' as the 'accruals basis'.

Simpler accounting (the cash basis) was introduced in April 2013 and is modified in 2024 to make it the default tax accounting method for small business.

Four different methods of claiming tax relief for deductions

Once you have chosen accounting methods (cash or accruals), the next step is to work through the different rules governing what expenses you can claim as a deduction from business income.

Some of these rules become mandatory if you are adopting the cash basis. Some may be adopted voluntarily so you can, in certain circumstances, be free to 'mix and match'.

Each business is different and so the right combination of claims and reliefs depends on you.

  1. If you are adopting the 'cash basis' there are specific rules which define and restrict what expenses may be claimed.
  2. If you claim using the system of fixed-rate deductions instead of claiming actual expenses, and which can be used whether you are cash or accruals accounting, specific rules restrict certain claims if you are either using the cash basis or have claimed capital allowances.
  3. If you claim the trading allowance, you cannot claim any further tax relief for expenses, including flat-rate expenses.
  4. If a business has not claimed fixed-rate deductions, the rules governing deductions follow general principles. Expenses must be incurred Wholly and exclusively for business purposes.

Getting started: what is the cash basis?

Which system for me? See Cash or accruals accounting toolkit

Which expenses for me? See Flat rate expenses or actual cost toolkit

Small amounts of income or low expenses? See Trading Allowance


Squirrel ad


Are you enjoying our content? 

Thousands of accountants and advisers & their clients use rossmartin.co.uk as their primary TAX resource.

Register now to receive our FREE weekly SME Tax News update, discounts and briefings

 

Squirrel advert

Loving our content? 😍
Sign up Now!
For free tax news, cases,
discounts & special tax briefings

We hope you are enjoying this amazing Practical Tax Database here at www.rossmartin.co.uk.

 

.