ACCA Advanced Taxation (ATX) Practice Exam

Who is eligible to use the cash basis for small businesses?

1. Any incorporated business

2. Businesses with annual turnover exceeding £300,000

3. Only unincorporated businesses with annual turnover of £150,000 or less

4. Businesses with any annual turnover limit

The correct answer is: Only unincorporated businesses with annual turnover of £150,000 or less

The eligibility to use the cash basis for small businesses is specifically designed for certain types of entities and turnover thresholds. The correct answer states that only unincorporated businesses with annual turnover of £150,000 or less can utilize the cash basis. This choice is correct because the cash basis accounting method allows businesses to record income and expenses when they are actually received or paid, rather than when they are incurred. This simplified accounting approach is particularly beneficial for smaller, unincorporated businesses that may not have the same resources as larger companies to manage complex accounting practices. The £150,000 turnover limit ensures that this method is targeted to smaller entities, providing them a more straightforward and less burdensome regulatory framework. In contrast, incorporated businesses or those with annual turnovers exceeding certain thresholds are subject to different accounting standards, often requiring accrual accounting, which does not allow for the same level of simplification in financial reporting. Thus, the chosen threshold and the limitation to unincorporated businesses represents a strategic measure aimed at supporting smaller entities while maintaining the tax system's integrity and consistency.