Sarah Laing looks at the recent increase in the cash basis eligibility threshold and proposed reforms for capital expenditure.
Since 2013/14, certain unincorporated small businesses have been able to choose to use the ‘cash basis’ when calculating taxable income, under which participants are taxed on the basis of the cash that passes through their books, rather than being asked to undertake complex and time-consuming calculations designed for big businesses.
When the scheme was first introduced, small businesses could use the scheme if the aggregate of their cash basis receipts in the previous tax year did not exceed the VAT threshold for the year. However, it was announced in the 2017 Spring Budget that the cash basis threshold would be significantly raised from £83,000 to £150,000. This change has subsequently been enacted by statutory instrument (SI 2017/293) and applies for 2017/18 onwards.
The exit threshold above which the cash basis may not be used is set at double the entry threshold. This means that from 6 April 2017, the exit threshold is £300,000.
Certain types of businesses are still not permitted to use the cash basis, including companies.
Operation
The cash basis operates by reference to the tax year. Small businesses can calculate their taxable income for the tax year by adding or subtracting:
- receipts in connection with the business received in the tax year;
- payments made in the tax year to cover allowable expenses; and
- amounts allowed for simplified expenses.
The cash basis operates on a VAT-inclusive basis - the full amount of receipts and payments are counted, including any VAT element. If a business is registered for VAT, any VAT paid to HMRC will be an allowable expense, and any VAT refund received from HMRC will be taxable as a receipt in connection with the business.
Reform of expenditure rules
To date, the cash basis rules have prohibited a deduction for expenditure of a capital nature unless such expenditure would qualify for plant and machinery capital allowances under the ordinary tax rules. However, it was announced in the 2017 spring Budget that this general disallowance of capital expenditure rule is to be replaced with a more limited disallowance of capital expenditure incurred in relation to assets which are not used up in the business over a limited period.
If enacted, the change is expected to apply for 2017/18 onwards, and relief will be prohibited only for costs incurred in relation to the provision, alteration, or disposal of:
- any asset that is not a ‘depreciating asset’ (to be defined as having a useful life of up to 20 years);
- any asset not acquired or created for use on a continuing basis in the trade;
- a car (but, of course, business mileage-based relief is available);
- land (as defined);
- a non-qualifying intangible asset, (as per Financial Reporting Standard 105) including education or training; and
- a financial asset.
Costs in relation to the acquisition or disposal of a business, or part of a business, will also be excluded.
The provisions for this change were included in the original Finance Bill 2017 but did not appear in the much-reduced version of the Bill, which received Royal Assent on 27 April 2017. It is currently expected that, subject to the outcome of the General Election on 8 June 2017, a second Bill will be introduced in Parliament and the proposals outlined above are likely to be contained in that Bill.
Practical Tip:
Under the cash basis, bank and loan interest costs and financing costs, which include bank loan arrangement fees, are allowed up to an annual amount of £500. If a business has interest and finance costs of less than £500 then the split between business costs and any personal interest charges does not have to be calculated. Businesses should review annual business interest costs - if it is anticipated that these costs will be more than £500, it may be more appropriate for the business to opt out of the cash basis and obtain tax relief for all the business-related financing costs.
