Cash basis extended and limits raised
Accounts ending in 2017/18 for the self-employed and partnerships can be prepared on a cash basis if the turnover is no more than £150,000. For the first time this will also apply to rental income businesses.
HMRC has recently announced changes to the cash basis for accounting taxable profits. What are they and can you take advantage?
Since 2013 some businesses have been allowed to calculate their taxable profits using the cash basis, i.e. accounting for income when they are paid by a customer, and expenses when they pay them. Until now the only businesses allowed to use this method were sole traders and partnerships with an annual turnover of up to the VAT registration limit (£83,000 since 1 April 2016) or twice that if claiming Universal Credit (UC).
For accounting periods which end in 2017/18 or later years the cash basis turnover limit is increased to £150,000 (£300,000 if you claim UC) and you can keep using it until your turnover exceeds £300,000.
There are also changes to the way capital expenditure, e.g. on equipment and intangible assets such as licences, applies for cash basis accounts for 2017/18 onwards. The new rules are fiddly but slightly more generous than before, so it’s worth checking to see if you can now claim deductions for costs not previously allowed (see The next step ).
For 2017/18 and later years landlords of residential and commercial properties, will be allowed to use the cash basis for the first time. The rules that say which types of expense are deductible for property rental businesses remain unchanged. Tip. You don’t have to ask HMRC’s permission to use cash basis accounting, but you do need to indicate that you have used it when you complete your tax return by ticking the “cash basis” box.
The new cash basis rules are part of the build up to Making Tax Digital (MTD), which spells major changes in record keeping and reporting to HMRC.