Benefits of cash basis changes limited without restrictions overhaul, says ATT

The cash basis allows self-employed people to calculate their profits and therefore their income tax based on when income is received or payments made, rather than the traditional accruals basis accounting method, which records income and expenses when they are invoiced or billed.

The Government is consulting¹ on extending the cash basis to allow more businesses to take advantage of it, including:

• increasing the turnover thresholds for businesses allowed use the cash basis

• setting the cash basis as the default, with an opt-out for those who wish to use the accruals basis

• increasing the £500 limit on interest deductions

• relaxing restrictions on using relief for losses

But the ATT says changes such as altering the thresholds or setting the cash basis as the default method will not result in more businesses using the cash basis unless the rules around interest and losses are significantly changed.

Senga Prior, chair of the ATT Technical Steering Group, said: 

“There are many reasons besides tax why a business may choose the accruals basis over the cash basis. Accruals accounting provides a truer measure of the profitability and position of a business in a given period and is often required by banks for finance applications. The accruals basis is also more suitable for seasonal or fluctuating businesses, those that have high values of stock and larger businesses. Any changes to turnover thresholds, or setting the cash basis as the default, is therefore unlikely to encourage its take up.

“While were pleased to see the consultation explore increasing the current interest restriction limit of £500, we feel the proposed new limits of between £625 and £1,000 are still too low. The current limit was set more than 10 years ago, when the Bank of England base rate was 0.5%. It is now 4.50%, and therefore the limit is well overdue for review. We believe a more appropriate limit would be in the region of £5,000 to £10,000, which would increase the number of businesses choosing to use the cash basis.”

The ATT added that removing current restrictions on the types of loss relief that can be claimed could increase uptake of the cash basis, while an “extensive education campaign” should be launched to ensure those affected know what changes are made to the cash basis and can apply it correctly.

Senga Prior said:

“We believe that relaxing or removing the loss relief restrictions would encourage businesses to use the cash basis. In particular, new businesses that may be expecting to make a loss in their earlier years, and would otherwise have to wait a significant time to get relief through carrying these forward against future profits.”

Notes for editors

1. HMRC open consultation: Expanding the cash basis.