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

justwhat

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.

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.

Yes , but only a small loan so £500 will cover it. So no need for change from one method to the other.

Jeremy535897

Pennywise said:

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.

That would be a ludicrous outcome. The contract to pay the first year's interest is between the government and the bank. It isn't a "grant". I would be very interested to see this article you mention.

Jeremy535897

I think I have found it, or at least an argument for showing the interest not paid in year 1 as grant income and interest paid:
https://www.accountingweb.co.uk/tax/hmrc-policy/covid-19-accounting-cbils-loan

It quotes FRS 102:
2.52 An entity shall not offset assets and liabilities, or income and expenses, unless required or permitted by an FRS.
(a) Measuring assets net of valuation allowances (for example, allowances for inventory obsolescence and allowances for uncollectible receivables) is not offsetting.
(b) If an entity’s normal operating activities do not include buying and selling fixed assets, including investments and operating assets, then the entity reports gains and losses on disposal of such assets by deducting from the proceeds on disposal the carrying amount of the asset and related selling expenses.

It quotes FRS 105:
2.37 A micro-entity shall not offset assets and liabilities, or income and expenses, unless required or permitted by this FRS.
(a) Measuring assets net of valuation allowances (for example, allowances for inventory obsolescence and allowances for uncollectible receivables) is not offsetting.
(b) If a micro-entity’s normal operating activities do not include buying and selling fixed assets, including investments and operating assets, then the micro-entity reports gains and losses on disposal of such assets by deducting from the proceeds on disposal the carrying amount of the asset and related selling expenses.

Personally, I question the conclusion, because it is not a grant as such, like SEISS or CJRS. You won't see anything about taxation here, for example:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/888810/Taxation_of_coronavirus_support_payments_-_draft_new_clause.pdf

The government does not pay the taxpayer a grant for the taxpayer to use to settle the interest. As I said earlier, the contract concerning this interest is between the bank and the government. It's like saying that if your bank pays an introductory fee to a third party for your business, you should gross up your interest for this amount and treat it as some sort of receipt. When you buy a piece of plant and get a grant towards it, you put the full cost of the plant in fixed assets, and the grant in other income, because they are distinct items you know, and most of the time you pay the plant supplier the full amount, and receive the grant from the government (like CJRS with wages).

Having said all that, section 31E ITTOIA 2005 says that you only include income received and expenses paid in your calculation of profits for the cash basis. There is no payment of interest, and no receipt of grant, in year 1 of a BBL. See also s51A ands57B, and https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim70040