You will prepare for your taxes by either using cash basis or accruals basis. Cash basis was introduced to simplify reporting for smaller businesses. Here is a quick look at the differences:
Accrual basis accounting: Only income and expenses which apply to the accountancy year are recorded for that year. With this style of accounting you may need to calculate debtors and creditors to reach an accurate figure for your taxes.
Cash basis accounting: Income and expenses apply when you actually receive payment or when you pay for an expense.
You can elect to use cash basis accounting on your Self Assessment tax return if you have annual sales or turnover of less than £150,000.
Here are some things you may need to consider about cash basis accounting
- It is optional and you must elect to use it. It is not automatically applied
- You will have reduced opportunities for loss relief. Business losses can only be carried forward against future profits of the same business. They cannot be relieved against other income or carried back unless an accruals basis is used.
- Relief for interest paid is restricted to £500 per annum
- Cash basis is not available in a number of circumstances, so ensure that your business complies.
You can read more about cash basis accounting here.
