As part of tax simplification, the government plans to reform cash basis accounting rules by increasing the turnover threshold, possibly to £1.35m, to allow more businesses to use the system
HMRC has issued a consultation to consider proposals to extend the self-employed cash basis, which is a simplified way of calculating taxable profits for income tax purposes, eliminating accounting and tax complexities such as accruals and most capital allowances.
It is also considering whether to make the cash basis the default accounting method for small businesses, provided there was sufficient communication about any proposed change.
The consultation stated that ‘a change in the default accounting basis would be a fairly wide-ranging change, potentially affecting how millions of businesses would complete their self-assessment returns’.
The cash basis is already the default method for property businesses, so setting it as the default for trades would align the two types of income.
At the moment, under a third (29%) of small businesses report to HMRC on this basis. First introduced in 2017, the government wants to ensure as many businesses as possible are able to access the simplified accounting and is planning a radical overhaul of the threshold criteria.
The government is considering two proposals for the threshold, which currently stands at £150,000:
- to align the threshold with that used for the VAT cash accounting scheme, allowing businesses into the cash basis if they have turnover below £1.35m, and being required to leave the basis if they have turnover above £1.6m; or
- to remove the turnover threshold entirely, allowing any size of business to use the cash basis as long as they are not otherwise prevented from joining.
It is also considering increasing the £500 limit on interest deductions by increasing the limit to £625, £750, and £1,000, but welcomes suggestions on an appropriate level for the limit.
To broaden usage, it is also looking at relaxing restrictions on using relief for losses, although there are no details about how this would work in practice. The consultation is asking for feedback from stakeholders on their views.
It does outline the direction of travel, suggesting that 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, limit relief to businesses in the early years of trade, restrict the use of losses to other cash basis sources of income, or apply conversion rules to ensure that relief against accruals sources was appropriate.
The closing date for comment is 7 June 2023.
HMRC consultation, Expanding the cash basis for the self-employed