Cash or Accrual Basis for Preparing VAT Returns
One of the important decisions that a business owner must make when thinking about preparing their tax return is whether to prepare the tax returns on the cash or accrual basis.
Under the cash basis, income is recognised when it has been collected and expenses are recognised when they are paid. Under the accrual basis, income is recognised when it has been earned likewise expenses are recognised when they have been incurred.
A new business might have more unpaid expenses than uncollected income at year-end, and therefore might consider taking those additional net expenses as a deduction. This would be done by selecting the accrual basis.
However, in later years when the business is profitable, receivables should be greater than repayables, and so the business would be recording additional net income and paying more taxes if it had selected the accrual basis instead of the cash basis.
Once a decision has been made on whether or not to use accrual or cash accounting methods you will have to stay with that method throughout the life of your business. Permitted changes are possible after consulting with Her Majesty's Revenue & Customs.
Certain businesses, including those with larger revenues or inventories are not given and option and must choose the accrual method of submitting their tax returns.
Careful consideration should be given to which method is or is not used. It also important to seek professional advice to ensure that the best possible decision is being made in accordance with your business model.
