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Cash basis changes

Newsletter issue - December 2023

As with many new measures when they are first announced by HMRC or the Treasury, it takes some time for these to trickle through to come into effect. The government announced at Spring Budget 2023 that it would consult on expanding the cash basis. A formal consultation on proposals was launched on 15 March this year and ran until 7 June. And now the measure has taken the next step, having been announced in the Autumn Statement.

HMRC stated: 'This measure changes how the cash basis operates for trading income. Current rules set the accruals basis as the default method of calculation, and restrict which businesses are able to use the cash basis through turnover-based entry and exit thresholds. The current rules also set specific restrictions on deductions against profits for interest costs and set specific restrictions on the use of loss relief for losses generated under the cash basis.'

HMRC says the change 'removes restrictions on the use of the cash basis, reducing the complexity of tax returns and making tax simpler for small businesses.'

Up until now, businesses have only been able to join the cash basis if their cash basis turnover is less than £150,000. They are forced to leave in certain circumstances where turnover goes beyond £300,000.

'This measure removes this turnover restriction entirely,' HMRC says.

HMRC added: 'This measure sets the cash basis as the default method of calculating trading profits for eligible businesses, with an opt-out for accruals. It also removes the entry and exit thresholds based on turnover, and removes restrictions specific to the cash basis on interest deductions and loss relief.'

The changes will take effect from 6 April 2024.