HMRC have launched a new consultation on Extending the Cash basis for Self-Employed taxpayers.
The consultation, published with the Budget 2023 documents, asks for your views on options to extend and simplify the Self-employed Cash Basis, a simplified way of calculating taxable profits for Income Tax purposes.
The proposals mainly affect businesses currently eligible for the cash basis with turnover under £300,000. However, one proposal is to extend the cash basis to more sizeable businesses.
The consultation focuses on the four following policy proposals, as well as welcoming other ideas.
Policy proposals:
1. Increasing the turnover thresholds for businesses to use the cash basis. The government is primarily considering two proposals for the threshold:
- To align the threshold with that used for the VAT cash accounting scheme, allowing businesses into the cash basis if they have a turnover below £1.35 million and being required to leave the basis if they have a turnover above £1.6 million.
- To remove the turnover threshold entirely, thereby allowing any size of business to use the cash basis as long as they are not otherwise prevented from joining.
The government is, however, open to other suggestions for where to set the threshold for the cash basis.
2. Whether to set the cash basis as the ‘default’ method of calculating trading income for eligible businesses.
- This would mean that businesses would use the cash basis as a standard without having to make an active decision to move into the simpler regime. There would be an opt-out for accruals.
- Making the cash basis the default for trading income would align with the position for property income.
3. Increasing the £500 limit on interest deductions under a cash basis.
- Increases in the interest restriction will reflect the higher costs of borrowing since 2013 and expand the number of businesses that are able to use the cash basis without being dissuaded by the £500 restriction.
- The government is currently considering options for increasing the limit to £625, £750 and £1,000, but welcomes suggestions on an appropriate level for the limit.
4. Relaxing restrictions on using relief for losses made under the cash basis.
- Easing or removing the restrictions on trade loss relief for the cash basis, to move the treatment of losses closer to what would be seen under the accruals basis so that genuine economic losses are allowed as tax relief against other sources of income.
- This could particularly help new start-up businesses, where someone has another source of income that they could set their cash basis losses against while establishing a new business.
- Changes to the cash basis loss rules could set a specific limit on the amount of cash basis losses that could be used as sideways loss relief, could limit relief to businesses in the early years of trade, could restrict the use of losses to other cash basis sources of income, or could apply conversion rules to ensure that relief against accruals sources was appropriate.
- Any change that did not apply the standard accruals rules for losses or introduced a particularly complex restriction on the use of losses would have to be considered carefully to ensure that the simplification aims of the cash basis were being met.
The government says that its also keen to hear views on any other areas where the cash basis could be improved, to encourage more businesses to use the cash basis and to make the cash basis itself easier to use. For example, the government has received suggestions that allowing an optional end-of-year adjustment for stock could encourage businesses to use the cash basis that might not have seen it as a suitable way of calculating their profits in the past.
The government has also heard that there may be opportunities to more closely align the cash basis rules for Income Tax with the cash basis used to measure income for Universal Credit purposes.
It also wants to hear respondents' views on any interactions between changes to the cash basis and Making Tax Digital for Income Tax Self-Assessment (ITSA) and would like to hear from businesses, particularly self-employed businesses that use or would be eligible for the cash basis, their advisers, representative bodies, software providers, and other interested parties.
Summary of consultation questions
Turnover restriction
Question 1a: Under either of the options, would businesses within the newly-eligible population consider moving to the cash basis?
Question 1b: What are the benefits/disbenefits of aligning the threshold to the VAT cash accounting scheme, and what are the benefits/disbenefits of removing the threshold entirely?
Question 1c: Would increasing the cash basis threshold encourage businesses currently below the threshold to move into the cash basis, knowing that they would be able to stay in it for longer if their business grew? Would this have a significant or minor effect on businesses?
Question 1d: Are there any alternative changes to the entry or exit thresholds that would also increase the eligible population and encourage businesses to join the cash basis?
Cash basis default
Question 2a: Many businesses that would benefit from the cash basis currently do not use it, and many use it without electing to do so. Do you have any insight into why many businesses in the eligible population do not use the cash basis?
Question 2b: Would changing the cash basis to the default for trading income have an impact on whether businesses use the cash basis or accruals basis? What are the benefits or drawbacks of setting the cash basis as the default?
Question 2c: Under a cash basis default, what proportion of businesses would you expect to opt out and use the accruals basis?
Question 2d: Would you expect there to be a transition administrative burden for businesses brought into the cash basis by the default, and are there any changes to the transition process for entering the cash basis that could help to smooth any burdens?
Question 2e: To what extent would businesses need help and support with understanding the change from the default accruals basis to the cash basis?
Interest restriction
Question 3a: What would be an appropriate level to set the interest restriction to? Are any of the 3 options proposed an appropriate level, considering the balance between allowing up-to-date costs of financing and the distortive effects of allowing private borrowing costs as deductions?
Question 3b: To what extent would increasing the interest restriction in the cash basis have an effect on whether businesses choose to use the cash basis or not? Does the interest restriction influence decisions to join the cash basis where a business has interest costs below the £500 limit?
Question 3c: To what extent would you expect businesses currently using the cash basis to increase their interest deductions, either through further borrowing or not being limited by the current £500 maximum?
Question 3d: Is the form of the current interest restriction appropriate for the cash basis? Are there any changes to the interest restriction rule itself, aside from changes to the limit, that would help to increase the number of businesses that are able to use the cash basis while allowing appropriate deductions for interest costs?
Loss restrictions
Question 4a: Would removing or relaxing the cash basis trade loss relief restrictions have an effect on whether businesses with losses choose to use the cash basis?
Question 4b: Is the burden of moving out of, and then back into, the cash basis to claim sideways loss relief currently having an effect on businesses’ decisions to use the cash basis?
Question 4c: Are the restrictions on loss relief under the cash basis dissuading new businesses, that may be making losses in their early years of trade, from using the cash basis?
Question 4d: What changes to the loss relief restrictions for the cash basis do you think would have the greatest effect on the number of businesses that would be eligible for, and use the cash basis?
Interactions and other improvements to the cash basis
Question 5: Are there any specific interactions, benefits, or issues that could arise from a combination of some or all of the options outlined in this consultation document?
Question 6: Are there any other areas of the cash basis that could be modified or improved to increase eligibility, take up, or simplicity?
Question 7: Would allowing an optional end-of-year adjustment for stock under the cash basis be a feasible or helpful addition, and would it encourage more businesses to use the cash basis?
Question 8: Are there any opportunities to more closely align the rules for measuring self-employment income under Universal Credit with the self-employed cash basis? Would closer alignment encourage more people to use the cash basis, or provide simplification benefits for people already using the cash basis?
Question 9: Are there any non-legislative changes that could be made to improve understanding and use of the cash basis for eligible businesses? Would an education campaign to inform small businesses of the cash basis encourage more to use it, even without changes to the cash basis itself?
Question 10: Could any of the proposals or ideas in this consultation document for reforming the cash basis be applied to income from property businesses? Would increasing or maintaining alignment between the trading income cash basis and property income cash basis have an effect on simplicity or take-up?
Question 11: Any changes to the trading income cash basis would automatically apply to partners in partnerships that use the cash basis; are there any particular issues that should be taken into account when considering the impact of these changes on partnerships, and should any of these proposed changes not apply to partnerships?
Question 12: What other interactions between reforms to the cash basis and Making Tax Digital for ITSA should the government take into consideration?
Question 13: What is your view on whether encouraging/expanding the cash basis will improve sole traders’ experience of MTD for ITSA, particularly for very small businesses, and why?
How to respond
Responses should be sent by 7 June 2023, by email to
The consultation will run from 15 March 2023 to 7 June 2023.
Useful guides on this topic
Spring Budget 2023: at a glance
Freeview summary of the measures announced in the Budget 2023
Accounting: Simpler Income Tax (cash basis)/fixed expenses
Small unincorporated businesses have to choose between several different combinations of accounting methods in order to work out their profits for tax purposes.
Getting started: what is the cash basis?
Which system for me? See Cash or accruals accounting toolkit
Which expenses for me? See Flat rate expenses or actual cost toolkit
Small amounts of income or low expenses? See Trading Allowance
External links
Consultation: Expanding the cash basis
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