ICAEW’s Tax Faculty has responded to HMRC’s consultation on expanding the cash basis. The cash basis is an optional regime for self-employed individuals with turnover below £150,000 to calculate their trading profits subject to income tax. 

In its response (ICAEW REP 50/23), the faculty notes that the cash basis is of most relevance to smaller businesses (those with turnover of no more than £30,000) that tend not to 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 and others 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. It therefore supports the extension of the turnover threshold, which currently restricts businesses with turnover exceeding £150,000 from using the cash basis.

The process of carrying out a bank reconciliation and making accruals adjustments provides a valuable test of the accuracy of a business’ accounting records, the faculty also notes. Without such checks and adjustments, there is a risk that the accuracy of a business’ accounting records would be compromised.

The faculty observes 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. 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 (eg, loan interest) and use of sideways tax relief for losses. It notes that these restrictions are currently discouraging some businesses from using the cash basis that would benefit from the simplification it provides.

• Read ICAEW’s consultation response