The idea of a simpler system for businesses to work out taxable profit sprang from an Office of Tax Simplification’s (OTS) report. The Chancellor clearly liked the idea as not only did he run with it, but he substantially broadened the scope of businesses that will be allowed to use it.
The scheme, known as the voluntary simplified cash basis (VSCB) is open to businesses where their annual turnover is up to £83,000 (for 2016/17) (VAT inclusive), but they can stay in until this reaches £166,000 for 2016/17. One disappointment though, is that companies are excluded; however, directors and company owners might still be in a position to indirectly use the VSCB for their company.
Tip. Directors who are active in the trade of their company, e.g. anyone from a builder who works on site through to an insurance consultant who visits clients, can provide services to their company on a freelance (self-employed) basis. As long as the arrangement is set up properly, it’s not only a tax-efficient method of extracting profit, it will give them a chance to take advantage of the VSCB on their freelance income.
VSCB will mean more straightforward bookkeeping in that you won’t need to take account of timing differences between purchases and sales.
Example. Fred starts a market stall selling hardware on 1 May 2016. His sales in the first year are £75,000 and so he can use the VSCB to work out his tax. On 30 April 2016 he holds stock which cost £12,000. The normal rules mean that he can’t claim a tax deduction for stock on hand in his first accounts because it’s unsold and therefore has not contributed to his profit for the year. However, using the VSCB he can claim for any business expense actually paid for, including stock.
VSCB possible cons
The scheme allows you to deduct fixed amounts for certain costs such as those for working from home. There are also be fixed rate deductions for business use of cars and motorbikes. The trouble with fixed deductions is that if you spend more than this you won’t be able to claim a tax deduction for the difference. But that’s not all. Trap. We think the main disincentive for using VSCB is that you aren’t entitled to claim for interest you pay on loans and overdrafts. However, it’s start-ups – the very type of business likely to qualify for VSCB – which are likely to be borrowing money.