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HMRC internal manual

Business Income Manual

From
HM Revenue & Customs
Updated
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Cash basis: transitional adjustments: entering the cash basis: examples: debtors, creditors, stock

  1. Debts owed by customers

If the previous tax return was prepared on the accruals basis, the taxable profit figure might have included amounts the business had earned but not received by the year end. An adjustment is required the first time a cash basis tax return is prepared, so that the business is not taxed twice.

Example:

In the first tax year using the cash basis, the business receives £32,000 from customers. £1,750 of the £32,000 had been owed by customers at the end of the last tax year, in respect of sales made last year (so that £1,750 had been taxed in the last tax year).

Transitional adjustment:

Total cash receipts from customers £32,000
   
Less: last year’s year end debtors (£ 1,750)
Adjusted cash basis receipts £30,250
  1. Amounts owed to suppliers

If the previous tax return was prepared on the accruals basis, the taxable profit figure might have included amounts the business had not paid by the year end. An adjustment is required the first time a cash basis tax return is prepared, so that the business does not get relief twice on the same item of expenditure.

Example:

In the first tax year using the cash basis, the business pays £14,000 to suppliers.

£950 of the £14,000 had been owed to suppliers at the end of the last tax year, in respect of purchases made last year (so that £950 had been included as a deduction in the last tax year).

Transitional adjustment:

Total cash payments to suppliers £14,000
   
less: last year’s year end creditors (£ 950)
Adjusted cash basis purchases £13,050
  1. Trading stock

If the previous tax return was prepared on the accruals basis, the taxable profit figure might have been adjusted for the value of stock held by the business at the year end. An adjustment is required the first time a cash basis tax return is prepared, so that the business gets tax relief on the cost of that stock.

Example:

At the end of the last tax year before the cash basis, the business had goods that had cost £475 in its year end stock. In working out last year’s business profits on the accruals basis, the £475 cost of that stock would not have been included as an expense. In the first tax year using the cash basis, the business pays £18,000 to suppliers.

If an adjustment was not made in the first cash basis tax return, the business would not get tax relief for that £475. The adjustment is done by adding this to the amounts paid for purchases in the cash basis period.

Transitional adjustment:

Total cash payments to suppliers £18,000
   
plus: last year’s closing stock £ 475
Adjusted cash basis purchases £18,475