Sole trader - CASH IN accounting - What happens with loans or investor cash injection?

justwhat

Sole trader - CASH IN accounting - What happens with loans or investor cash injection?
Is the initial credit ignored for tax purposes/turnover?
(cannot see any examples on the web, only examples of interest)

Jeremy535897

For a sole trader:

• any cash put in to the business by the owner is called capital introduced, and forms part of the capital account, which is due to the owner. It is not turnover, and normally has no effect for tax purposes
• any loan put in to a sole trade by someone else is just that, a loan. It is not turnover. It is not taxable, nor are repayments of the loan deductible (interest is normally deductible)
• a sole trader cannot lend money to himself. It is capital introduced
• nobody else can invest in a sole trade. Anything put in by anyone else is a loan (if it is a gift, add it to capital introduced)

Ray_Coman

You can obtain tax relief on interest payable on a business loan.  This applies even if the loan was secured on your home (i.e. part of a mortgage.)

justwhat

Ray_Coman said:

You can obtain tax relief on interest payable on a business loan.  This applies even if the loan was secured on your home (i.e. part of a mortgage.)

But only upto 500 pound based on "cash in " accounting?

justwhat

Jeremy535897 said:

For a sole trader:

• any cash put in to the business by the owner is called capital introduced, and forms part of the capital account, which is due to the owner. It is not turnover, and normally has no effect for tax purposes
• any loan put in to a sole trade by someone else is just that, a loan. It is not turnover. It is not taxable, nor are repayments of the loan deductible (interest is normally deductible)
• a sole trader cannot lend money to himself. It is capital introduced
• nobody else can invest in a sole trade. Anything put in by anyone else is a loan (if it is a gift, add it to capital introduced)

So even on a " cash accounting basis" you will have a "capital/loan balance sheet"?

Jeremy535897

Cash accounting just ignores movements in things like debtors and creditors. You still have to balance the net assets (or liabilities) of the business with the capital account. Seehttps://www.litrg.org.uk/tax-guides/self-employment/working-out-profits-losses-and-capital-allowances/how-do-i-prepare-my for more detail.

As an accountant, personally I have no idea why anyone uses the cash basis, because:

• the tax relief on capital items is inflexible
• there is an arbitrary limit on the deductibility of finance costs
• you can't use losses properly
• your accounts don't give a true picture of your business

The link above explains this.

nick74

Jeremy535897 said:

Cash accounting just ignores movements in things like debtors and creditors. You still have to balance the net assets (or liabilities) of the business with the capital account. Seehttps://www.litrg.org.uk/tax-guides/self-employment/working-out-profits-losses-and-capital-allowances/how-do-i-prepare-my for more detail.

As an accountant, personally I have no idea why anyone uses the cash basis, because:

• the tax relief on capital items is inflexible
• there is an arbitrary limit on the deductibility of finance costs
• you can't use losses properly
• your accounts don't give a true picture of your business

The link above explains this.

Wasn't it another case of a clueless Chancellor trying to 'simplify' the tax rules and thus add yet another layer of complexity?

justwhat

Jeremy535897 said:

Cash accounting just ignores movements in things like debtors and creditors. You still have to balance the net assets (or liabilities) of the business with the capital account. Seehttps://www.litrg.org.uk/tax-guides/self-employment/working-out-profits-losses-and-capital-allowances/how-do-i-prepare-my for more detail.

As an accountant, personally I have no idea why anyone uses the cash basis, because:

• the tax relief on capital items is inflexible
• there is an arbitrary limit on the deductibility of finance costs
• you can't use losses properly
• your accounts don't give a true picture of your business

The link above explains this.

Thanks for the help.
We use cash accounting. Because
We have no debt or credit (until now BBL)
Profit is high and never make a loss. (however we now face some fluctuation in sales/cashflow due to covid)
We do not wait on payment.
We do not have machinery or assets.(next too none)
no VAT
Its a simple business with low turnover , high profit.

Jeremy535897

justwhat said:

Jeremy535897 said:

Cash accounting just ignores movements in things like debtors and creditors. You still have to balance the net assets (or liabilities) of the business with the capital account. Seehttps://www.litrg.org.uk/tax-guides/self-employment/working-out-profits-losses-and-capital-allowances/how-do-i-prepare-my for more detail.

As an accountant, personally I have no idea why anyone uses the cash basis, because:

• the tax relief on capital items is inflexible
• there is an arbitrary limit on the deductibility of finance costs
• you can't use losses properly
• your accounts don't give a true picture of your business

The link above explains this.

Thanks for the help.
We use cash accounting. Because
We have no debt or credit (until now BBL)
Profit is high and never make a loss. (however we now face some fluctuation in sales/cashflow due to covid)
We do not wait on payment.
We do not have machinery or assets.(next too none)
no VAT
Its a simple business with low turnover , high profit.

In that case there will be almost no difference between the two anyway. Once interest on the BBL kicks in, the £500 limit on finance costs per annum will presumably be a reason to change.

Jeremy535897

nick74 said:

Jeremy535897 said:

Cash accounting just ignores movements in things like debtors and creditors. You still have to balance the net assets (or liabilities) of the business with the capital account. Seehttps://www.litrg.org.uk/tax-guides/self-employment/working-out-profits-losses-and-capital-allowances/how-do-i-prepare-my for more detail.

As an accountant, personally I have no idea why anyone uses the cash basis, because:

• the tax relief on capital items is inflexible
• there is an arbitrary limit on the deductibility of finance costs
• you can't use losses properly
• your accounts don't give a true picture of your business

The link above explains this.

Wasn't it another case of a clueless Chancellor trying to 'simplify' the tax rules and thus add yet another layer of complexity?

Probably (Osborne). What they don't understand is that any accountant is going to have to look at both methods to work out which is best. I doubt most do it on an annual basis, but it just adds complexity. It is only worthwhile for the simplest cases without an agent, and for them the difference is negligible anyway.

Pennywise

Jeremy535897 said:

justwhat said:

Jeremy535897 said:

Cash accounting just ignores movements in things like debtors and creditors. You still have to balance the net assets (or liabilities) of the business with the capital account. Seehttps://www.litrg.org.uk/tax-guides/self-employment/working-out-profits-losses-and-capital-allowances/how-do-i-prepare-my for more detail.

As an accountant, personally I have no idea why anyone uses the cash basis, because:

• the tax relief on capital items is inflexible
• there is an arbitrary limit on the deductibility of finance costs
• you can't use losses properly
• your accounts don't give a true picture of your business

The link above explains this.

Thanks for the help.
We use cash accounting. Because
We have no debt or credit (until now BBL)
Profit is high and never make a loss. (however we now face some fluctuation in sales/cashflow due to covid)
We do not wait on payment.
We do not have machinery or assets.(next too none)
no VAT
Its a simple business with low turnover , high profit.

In that case there will be almost no difference between the two anyway. Once interest on the BBL kicks in, the £500 limit on finance costs per annum will presumably be a reason to change.

Sure I read that the correct accounting/tax treatment of the first "interest free" period of a BBL loan is to charge the interest to the P&L and show a corresponding amount as covid grant income in other income.  So under cash accounting, the interest payable would be limited to £500 but the entire corresponding grant received would be fully taxable.  The article I was reading was pretty clear that you couldn't net them against eachother and not show it in the accounts just because there was no "cost" to the business.