Cash basis review welcome as it passes its 10th birthday

The 10th anniversary of the introduction of the income tax cash basis is the right time for a review, says the Chartered Institute of Taxation, with simplification of the rules key to encouraging more businesses to use it.

 

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 to 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

 

The CIOT2 has called for simplifications to the rules, along with improved guidance due to the “significant lack of understanding and awareness” of the cash basis among businesses, particularly those which do not use an accountant.

 

Margaret Curran, CIOT Technical Officer, said:

 

“Despite the cash basis not being introduced in exactly the way that the Office of Tax Simplification (OTS) recommended in its 2012 report, it does provide some simplification for the businesses which use it. However, we agree with HMRC that there are aspects of the current rules that can deter otherwise eligible businesses from using the cash basis, and removing some of the inherent complications and restrictions may encourage more businesses to consider using it.

 

“Any changes to the current rules must go hand-in-hand with improving and updating the guidance. If guidance is improved, this may help increase understanding and awareness and lead to more businesses taking advantage of the simplifications offered by using the cash basis.”

 

The CIOT has also called for the current restrictions on loss relief and finance costs to be relaxed, while questioning proposals to make the cash basis the default approach without understanding how or why some businesses use it. It added that even with wholesale changes, many businesses are still unlikely to use it.

 

Margaret Curran said:

 

“We are concerned that HMRC are proposing making the cash basis the default without fully understanding why eligible businesses are not currently using it. There is a significant lack of understanding and awareness of the cash basis particularly amongst unrepresented businesses. Making the cash basis the default could lead to businesses using it ‘by accident’ even though the accruals basis may be more suitable for their needs.

 

“We suggest HMRC conduct some research to try to identify the precise reasons why businesses which are eligible to use the cash basis choose not to (or perhaps are using it unknowingly), before making a decision on whether to make it the default basis.

 

“Ultimately the cash basis, even an expanded and less restrictive version, is still likely to be suitable only for small businesses with very straightforward financial affairs.”