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Cash basis reform: potential turnover threshold changes

  • 13th April 2023

With basis period reform now underway, HMRC is looking at further tax simplification for sole traders and partnerships by increasing the cash basis turnover threshold. The cash basis scheme removes complexities such as accruals and most capital allowances.

The cash basis can only be used currently if a business’s annual turnover does not exceed £150,000, although the business can then remain in the scheme until turnover reaches £300,000.

Income threshold

HMRC is considering two alternatives to expand the availability of the cash basis:

  • The turnover limit could be set at £1.35 million, with businesses not required to leave until turnover reaches £1.6 million. These are the same limits that apply for the VAT cash accounting scheme.
  • The turnover threshold could be removed so that any business, regardless of size, can join.

HMRC is also looking at making the cash basis the default method of calculating trading income for eligible businesses, so the scheme would become ‘opt out’, rather than the current ‘opt in’.

Other proposals

Two reasons why a business may currently choose not to use the cash basis are because of restrictions on relief for interest costs, and the use of losses. HMRC is looking at changes here, although nothing definite has been announced:

  • Interest and bank charges are restricted to a maximum deduction of £500. This limit might be increased, possibly as high as £1,000. With the rise in interest rates, the £500 restriction means the cash basis is currently not beneficial for many businesses.
  • If the cash basis is used, any losses can only be carried forward – they cannot be relieved against other income or carried back. A number of options are being considered, but it does look as if loss relief rules will be relaxed, just not to the extent that relief is available where normal accounting rules are used.

HMRC’s guide to the cash basis can be found here.

If you would like to discuss this in any further detail, please do not hesitate to contact us.

Any news or resources within this section should not be relied upon with regards to figures or data referred to as legislative and policy changes may have occurred.