HMRC are removing many of the restrictions on the
use of the cash basis, reducing the complexity of tax returns and making tax simpler for small businesses (apparently!).
The cash basis is a method that businesses can use to calculate trading profits for income tax purposes, as an alternative to using traditional ‘accruals’ accounting. The cash basis is a simplified regime that reduces the complexity of reporting income to HMRC while still providing an appropriate measure of trading profits for many businesses.
Currently, a business has to elect to use the cash basis, usually through notifying HMRC as part of the Self Assessment tax return. The accruals basis is the default method of calculating profits, and the cash basis is an ‘opt-in’ regime.
A forthcoming change is to set the cash basis as the default method of calculating trading profits. An election will no longer be required to use the cash basis, and businesses will calculate their trading profits using the cash basis unless they make an election to use the accruals basis.
Currently, businesses are only able to join the cash basis if their cash basis turnover is less than £150,000, and are forced to leave in certain circumstances where their turnover exceeds £300,000. This measure removes this turnover restriction entirely. Eligible businesses, such as self-employed people and partnerships of individuals, of any size will be able to use the cash basis, allowing them to continue using the cash basis as they grow.
Businesses that currently use the cash basis are unable to deduct more than £500 in interest costs from their taxable profits each year, a restriction that was set when the cash basis was introduced in 2013. This measure removes this interest restriction entirely, allowing businesses that use the cash basis to deduct any amount of interest as long as it is incurred wholly and exclusively for the purposes of the trade. This aligns the cash basis and accruals basis rules on interest deductions.
Currently, cash basis users are also restricted in the loss relief that they are able to benefit from for losses that are generated in the cash basis. Also, losses generated in the cash basis can only be carried forward and set against future profits from the same trade, or used when the business stops trading. This measure removes this restriction, allowing cash basis losses to be used in the same way as accruals basis losses. This means that cash basis losses will be able to be set sideways against general income of the same period, or carried back to earlier years, subject to the same general loss relief rules as accruals losses.
In certain circumstances it may be advantageous to use the cash basis, but there may also be disadvantages.
