Cash basis expansion adds flexibility for businesses

Legislation will remove turnover restrictions and allow businesses to move from cash basis to accruals and back

Legislation will be introduced in Autumn Finance Bill 2023 primarily to amend Part 2 ITTOIA05. This will set the cash basis as the default method of calculating profits for trading income.

A new election will be introduced to allow businesses to opt out of the cash basis and switch to accruals. This election will have effect from the tax year in which it is made but can be withdrawn to allow the business to move back to the cash basis. This legislation will also stop the cash basis default applying to certain types of business that are normally excluded from using the cash basis.

Currently, businesses are only able to join the cash basis if their cash basis turnover is less than £150,000 and are forced to leave in certain circumstances where their turnover exceeds £300,000.

This measure removes this turnover restriction entirely. Eligible businesses, such as self-employed people and partnerships of individuals, of any size will be able to use the cash basis, allowing them to continue using the cash basis as they grow.

Businesses that currently use the cash basis are unable to deduct more than £500 in interest costs from their taxable profits each year, a restriction that was set when the cash basis was introduced in 2013. The measure removes this interest restriction entirely, allowing businesses that use the cash basis to deduct any amount of interest as long as it is incurred wholly and exclusively for the purposes of the trade. This aligns the cash basis and accruals basis rules on interest deductions.

Currently, cash basis users are also restricted in the loss relief that they are able to benefit from for losses that are generated in the cash basis. Also, losses generated in the cash basis can only be carried forward and set against future profits from the same trade, or used when the business stops trading.

The measure removes this restriction, allowing cash basis losses to be used in the same way as accruals basis losses. This means that cash basis losses will be able to be set sideways against general income of the same period, or carried back to earlier years, subject to the same general loss relief rules as accruals losses.

These changes will have effect for the tax year 2024/25 onwards.