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Cash basis accounting - effect on tax of reducing profits

Adrian Mooy - Wednesday, March 11, 2020
 
There are circumstances where using the cash basis of accounting can reduce your profits and create a permanent tax saving. These include where calculating your profits using the normal basis of accounting means:

 

 • you’re liable to the high income child benefit charge (HICBC)
 • some of your income falls into a higher tax bracket; or
 • your taxable income exceeds £100,000.

 

Example
 
John is self-employed. His accounts (prepared on the normal accruals basis) for the year ended 31 March 2019 show a profit of £61,000.
 
If the cash basis of accounting were used his profit would be £52,000. John’s spouse receives child benefit for two children for 2018/19 of £1,789.
 
Because his profit for that year is greater than £50,000 John is liable to the HICBC. The maximum charge would apply because his income exceeded £60,000, i.e. the charge would be £1,789. However, using the cash basis of accounting would reduce John’s profits and therefore the HICBC to £358 saving him £1,431.

 

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