Will simplified schemes help your business?

Since the start of the tax year a new scheme has been introduced by HM Revenue & Customs. Designed to make it easier for smaller firms to manage their tax affairs, self-employed individuals or partnerships are able to choose from two new processes, simplified expenses and/or cash basis. However, Chartered Accountants Newby Castleman warn that not every small business will be better off under these new schemes.

Small businesses with an income of £79,000 or less a year (VAT threshold) can use the ‘cash basis’. This allows businesses to record money when it actually comes in and goes out, as opposed to the accrual basis where income and expenses are recorded when an invoice is issued or bill received.

Ian Fawcett, Tax Partner at Newby Castleman, comments, “The optional cash basis can suit smaller businesses because, at the end of the tax year, they don’t have to pay Income Tax on money not yet received. For many business owners it is also an appealing method due to the reduction in record keeping and there will generally be no need to distinguish between capital and revenue expenses.

However, it is only available to those below the VAT threshold and limited companies and LLPs will also not be able to opt in. Adjustments will also have to be considered when coming in and out of the new system and this may prove counter productive and more time consuming. It is also worth noting that some banks and institutions may not accept cash basis accounts and loss relief is restrictive.”

Simplified expenses are designed to be easier to follow when calculating some business expenses. They include: fixed allowances for business mileage, a flat rate to calculate expenses relating to business use of home and a three tier banded rate to calculate the adjustment for private use of business premises.

Ian comments: “The simplified expenses may take the burden of paperwork away but businesses need to consider if they will generally be a lot worse off using them. Although from the outside they may seem straight forward, the allowance is small and it may be more beneficial for a business to use the precise method, claiming for actual expenses incurred.”

Ian adds, “The problem with simplified expenses and cash basis is that it sounds almost too good to be true. Although designed to take away the complex tax calculations, businesses will still ultimately have to determine whether it is right for them in the long-run and review all the pros and cons of such a system. So, when it comes to answering the question of will simplified expenses help small businesses, it’s always worth asking the experts first.”

For information or advice about the two new tax schemes or for any other tax matters you may need assistance with, visit newbyc.co.uk.