HMRC’s Good News for Micro Business Owners

Pay taxes messageKeeping up with changes in the law which affect micro businesses is not always easy. Today I want to highlight some good news which is mainly available to self-employed individuals.

You may not be aware that accounts and your Self-Assessment Tax Return should always be prepared on what is known as an “accrual basis”. This means that you account for income and expenditure when you issue an invoice to a customer or when you receive an invoice from a supplier, NOT when you are paid or when you pay a supplier.

However, from April 2013 the Government has introduced a couple of simpler income tax measures for small businesses. From the 2013/14 tax year, self employed individuals and partnerships (NOT Limited Companies) carrying on the smallest trading businesses will be able to choose to be taxed on the following methods:

  • Cash basis method

  • Simplified expenses method

 

What is the cash basis method?

Cash basis is a way of working out your income and expenses for your Self Assessment tax return. As the expression implies, by using this method you can account for income and expenditure not when you issue an invoice, but when you get paid or when you pay someone. Using the cash basis method should make it easier for smaller businesses because, at the end of the tax year, if you are self-employed or work in a partnership you won’t have to pay Income Tax on money you haven’t received yet.

You can use cash basis if you:

  • are a small self-employed businesses (sole traders and partnerships)

  • have an income of £79,000 or less a year (this is the threshold when you have to register for VAT)

 

Can I use the Cash Basis Method to record VAT?

HM Revenue & Customs allows both self-employed and limited companies to account for VAT on a cash basis method. Therefore, whilst the accrual basis must be used by limited companies for the preparation of accounts, all businesses including limited companies can account for VAT using the cash basis method.

Clearly it is vital for businesses to use this method, otherwise VAT becomes due when you issue an invoice and not when you get paid. You can use cash accounting if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million. You can continue to use cash accounting until your VAT taxable turnover exceeds £1.6 million

 

When can I use the Simplified Expenses Method?

With simplified expenses you can use flat rates instead of working out your actual business expenses which can require more complex calculations. As per the cash basis method only sole traders or business partnerships can use simplified expenses.

You can use flat rates for any or all of these expenses:

  • business costs for vehicles

  • business use of your home

  • private use of business premises as a home

HM Revenue & Customs publishes tables so that the above expenses can be calculated on flat rates. In my view the only meaningful flat rates are those applicable to vehicles used for business. The rates are known as mileage rates. Up to 2012/2013, mileage rates could be used by self-employed as a concession and business which are VAT registered were not allowed to use mileage rates, but could only use actual costs for motor expenses. The difference now is that self-employed businesses which are registered for VAT can work out the cost of travel based on these rates. Therefore it is a matter of choice for self-employed businesses which method to use.

For the current tax year the mileage rates are as follows:

  • 45 pence for the first 10,000 miles and 25 for the remainder. If you use a motorbike the rate is 24 pence per mile

NB. If you are a company director and use your own vehicle you cannot get reimbursed by your company for the cost of travel based on actual motoring costs, instead you must claim mileage. All claims whether made by self-employed individuals or company directors must be substantiated by a mileage record.

 

A Quick Guide to Expenses Which can be Claimed for Business Expenses

You must keep a record not only of your sales invoices (easy enough), but also of your expenses. What might these include? Here is a list:

  • costs of sales or buying goods to sell

  • sub-contractor costs

  • employee costs (wages, NI contributions)

  • premises costs – for example, heat, light, rates, insurance, security to the extent they relate to the business

  • repairs

  • general administration (post, stationery, printing, etc)

  • business motoring costs

  • travel and subsistence

  • advertising, promotion

  • legal and professional costs, for example, accountancy

  • bad debts

  • interest on bank and other loans

  • costs of business phone calls.

  • training costs.

In addition you can claim an allowance on the cost of assets which you use for your business such as computers, tools, plant and equipment. This is known as Annual Investment Allowance. From January 2013 the annual investment allowance is increased to £250,000, which means that the cost of most assets is covered in full.

 

micro business actionMicro Business Action

It is always a good idea to speak to the accountant before you make important financial decisions. The accountant will be able to say what methods are best for your business and when it is a good time to invest in order to get the maximum tax advantage. Are you using the right method that is most appropriate for your business. is it time for a review? Take some time to ensure that you are basing your business on the right methods, it will save you money and ensure you avoid unnecessary costs.

Giuseppe Colombi

Giuseppe Colombi is an accountant with over twenty five years experience and owner of Best Choice Accountancy Ltd. He has a friendly, practical style and removes the stress of accounts, tax and deadlines, helping you focus on building your business. He enjoys sharing his knowledge of business, accounting and tax with business owners like you, small companies, contractors and freelancers.

Liked this post? Receive daily ideas direct to your inbox and get growing your micro business

Leave a Comment

*

Link to Your Latest Post Using CommentLuv