ICAEW supports expanding cash basis for the self-employed

The ICAEW’s tax faculty has voiced its support to extend the cash basis for the self-employed, but warned that reliance on it could jeopardise the accuracy of accounting records kept by businesses. 

In a response to the HMRC’s consultation on expanding the cash basis, the association’s tax faculty said the cash basis is an optional regime for self-employed individuals with turnover below £150k to calculate their trading profits subject to income tax. 

The faculty also notes that the cash basis is of most relevance to smaller businesses with turnovers of less than £30k that tend to not have significant accruals or prepayments.

Above this size, banks and other third parties typically require an accruals-based set of accounts for making lending decisions relating to the business. It therefore casts doubt on the benefit that larger businesses gain from preparing accounts for tax purposes on the cash basis.

However, the faculty recognises that use of the cash basis could represent a simplification for larger businesses where an accruals basis set of accounts is not required for other purposes.

The ICAEW therefore said it supports the extension of the turnover threshold, which currently restricts businesses with turnover exceeding £150k from using the cash basis.

The faculty also observed that ‘Making Tax Digital’ for income tax self assessment is being introduced with the objective of encouraging businesses to improve the accuracy of their accounting records. It is concerned that expanding the cash basis to a wider population of taxpayers could compromise that aim. 

It therefore does not support the suggestion that the cash basis could become the default method of calculating taxable profits for unincorporated businesses. As a result, the faculty recommends that the cash basis remains something that a business must elect to use.

The Tax Faculty also supports the extension of the cash basis by relaxing the restrictions currently in place regarding the deductibility of finance costs such as loan interest and use of sideways tax relief for losses. 

It noted that these restrictions are currently discouraging some businesses from using the cash basis that would benefit from the simplification it provides.