Tx notes fa22 Final

3. Cash Basis for Small Businesses 
Certain small unincorporated businesses (sole traders and partnerships) may elect to use a cash 
basis to determine their tax adjusted trading profits instead of the normal accruals basis.
The election is available to those businesses with receipts for a 12 month accounting period 
assessable in the tax year that do not exceed £150,000.
A trader must leave the scheme if receipts assessable in the previous tax year exceed £300,000.
The cash basis will assess a business on its cash receipts less cash payments of allowable business 
expenses. Payables, receivables and inventory are ignored.
The accounting profit must be adjusted for taxation purposes mostly as for accruals accounting but 
with the main di
ff
erence being in relation to capital expenditure.
Expenditure on plant and machinery which would normally attract capital allowances will now attract 
tax relief with capital payments for plant and machinery (except cars) being deductible and capital 
receipts from sale of plant and machinery (except cars) being included in the calculation of the 
adjusted trading profit.
In respect of cars instead of claiming capital allowances the trader may instead use a fixed (or flat) 
rate deduction for tax purposes. The actual capital cost of acquiring a car for use in the business, 
the running costs and the sale proceeds are excluded from the profit calculation. The trader can 
instead claim as a deduction against the trading profit a mileage allowance for the business mileage. 
The allowance is at a rate of 45p per mile for the first 10,000 business miles and 25p thereafter - you 
will see these figures again in Chapter 9 when dealing with employees who use their own cars to do 
business mileage in relation to their employment.
Taxable trading profits for an accounting period under the cash basis are computed as:
 
Example 7
Adam commenced trading as a sole trader selling fresh fruit on June 1, 2022 and prepared his first 
set of accounts to May 31, 2023, for which the following information is available:
Sales for the period were £61,000 of which £4,000 was still owed by business customers at the end 
of the period.
Inventory at May 31, 2023 amounted to £1,800.
Purchases and expenses of the period (all allowable) amounted to £29,000 of which £2,000 was still 
owed to suppliers at the end of the period.
On June 1, 2022 Adam purchased equipment for use within the trade costing £8,000 and on 1 
October, 2022 a motor car costing £12,000 with CO2 emissions of 42 grams per kilometre. Adam 
uses the car 40% for private use and incurred motor expenses during the period of £3,600 in driving 
a total of 10,000 miles.