HMRC have published responses to the consultation ‘Expanding the cash basis’ which asked for taxpayer views on various options to extend and simplify the Self-employed Cash Basis, a simplified way of calculating taxable profits for Income Tax purposes.
The Consultation proposals would 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 four policy proposals included in the consultation were:
- Increasing the turnover thresholds for businesses to use the cash basis.
- Whether to set the cash basis as the ‘default’ method of calculating trading income for eligible businesses.
- Increasing the £500 limit on interest deductions under a cash basis.
- Relaxing restrictions on using relief for losses made under the cash basis.
Most respondents did not feel there was a need to extend the turnover threshold on the basis that:
- most businesses with turnover over £150,000 would be likely to opt for the accruals basis for commercial reasons, other than perhaps in some specific sectors such as barristers and consultants.
- Changes to other areas such as interest and loss relief restrictions were more likely to significantly impact the number of cash basis users.
Overall the view was that as there could be many unrepresented businesses using the cash basis informally without making the required election then making the cash basis the default could be helpful.
The majority of respondents suggested there should be a significant education and communications campaign to clearly explain the cash basis to businesses and allow them to make an informed choice of cash or accruals.
There was a consensus that the interest restriction level is too low at £500 and is putting some businesses off joining the cash basis. Some respondents suggested an increase to £5,000-£10,000 whilst others had a preference that the restriction is removed altogether.
The loss relief restriction was seen, in particular by accountants, as a direct deterrent to using the cash basis and one of the main reasons why businesses do not currently use the cash basis. As a result most respondents agreed that removing or relaxing this restriction would encourage more businesses to use the cash basis.
Most respondents agreed that any changes should also apply to general partnerships but should not be extended to property businesses.
Following these responses at Autumn Statement 2023 it was announced that from 6 April 2024:
- The cash basis will become the default method for calculating trading profits for the self-employed and partnerships.
- The turnover, interest and loss relief restrictions will be removed.
- Businesses not wishing to calculate their profits using the cash basis will need to make an election to use the accruals basis.
- The changes will not affect companies, property businesses or businesses otherwise excluded from using the cash basis.
Useful guides on this topic
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.
Cash or accruals accounting toolkit
Unincorporated businesses can elect to use one of two different methods of accounting for tax: simpler accounting (cash basis) or accruals basis accounting.
Flat rate expenses or actual cost toolkit
What types of expenses can I use fixed-rate expense deductions for? Which is better, fixed-rate deductions or actual cost?
What are the trading and property allowances? Who can claim them? What are the restrictions?
Consultation outcome: Expanding the cash basis - summary of responses