ACCA Advanced Taxation (ATX) Practice Exam

What is the turnover limit for a small business to use the cash basis?

1. £100,000

2. £150,000

3. £200,000

4. £300,000

The correct answer is: £150,000

The turnover limit for a small business to use the cash basis is set at £150,000. This limit is significant as it allows small businesses to adopt a simpler method of accounting based on cash receipts and payments rather than on an accrual basis. The cash basis can be advantageous for businesses that may struggle with cash flow, as they only pay tax on income that has actually been received, rather than on what is owed. The cash basis accounting system is suitable for smaller enterprises, often making it easier for them to manage finances without the complexities of more detailed accounting requirements. The £150,000 threshold is established to ensure that only smaller businesses, with typically lower levels of turnover, can benefit from these simplified reporting provisions. The other options, which suggest turnover limits beyond £150,000, do not align with the regulations governing cash basis accounting, as businesses exceeding this threshold must transition to standard accounting methodologies to comply with tax requirements.