The cash basis is a simplified method of calculating taxable profits for businesses. It involves reporting income and expenditure based on when the money was actually received or paid out, rather than requiring potential complex tax adjustments, such as accruals and capital allowances.
HMRC has carried out a consultation in relation to the cash basis, which has resulted in various changes. The changes are shown below and will be introduced in a Finance Bill in Spring 2024, to apply from the 2024/25 tax year onwards. These changes will not apply to the property income cash basis:
- Removal of the turnover restriction
Currently, to be able to start using the cash basis, a trade must have a turnover of less than £150,000. This threshold is being removed entirely, allowing businesses with any turnover level to use the cash basis if they wish to.
- Cash basis default
It has been decided that the cash basis will be the default method for calculating income and expenditure. However, businesses will still be able to opt to use the accruals method if they prefer by making an election.
Business that are not eligible to use the cash basis will still default into using the accruals basis. Further details on who can use the basis can be found here: www.gov.uk/simpler-income-tax-cash-basis/who-can-use-cash-basis
- Removal of the interest restriction
Currently those using the cash basis are subject to a £500 limit on the amount of interest they can claim as a deduction against profits. HMRC are removing the £500 limit entirely.
- Removal of the loss restriction
Currently, if a business uses the cash basis and makes a loss these losses can only be carried forward to offset against future profit of the business, when there are potentially more favourable opportunities for tax relief available for those using the accrual method of accounting.
The above restriction on losses is being removed, aligning the rules for losses under the cash basis with those under the accruals basis.
The aim is that the above changes should also help simplify the reporting required under Making Tax Digital (MTD) for Income Tax Self Assessment. The logic is that cash basis reporting will make the use of technology easier, assisting with MTD. However, it is important to consider whether this is the right option, especially where significant deposits are received or suppliers paid in advance of delivering the products or services to the customer as the accruals basis may defer the timing of tax payments.
If you have any questions for our Tax experts as a result of this Autumn Statement, please contact us on 01242 776000 or firstname.lastname@example.org.