Changes to the cash basis could have enormous consequences for large parts of the farming sector, experts are warning – but opportunities too.

Effective from 6 April 2024, the cash basis has become the default basis of calculating taxable trading profits for income tax purposes for all unincorporated businesses, except for those that are specifically excluded. Excluded businesses include partnerships with one or more corporate partners, LLPs and businesses using the herd basis or making averaging claims.

Under the cash basis (Ch3A, Part 2, Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)), an individual carrying on a trade could previously elect to calculate their profits on a ‘cash in, cash out’ basis, rather than using the traditional accruals method of accounting. This is simpler for many individuals as it removes the need for year-end adjustments such as the calculation of accruals and prepayments. 

Previous turnover limits removed

However, not all unincorporated businesses were eligible to use the cash basis: turnover from their trade needed to be £150,000 or less (doubled for Universal Credit claimants) for the year and to stay in the regime, their turnover should not exceed £300,000. These limits are now being removed so that unincorporated businesses of any size could qualify. This means farming businesses that were previously too large to qualify may now be in scope.

If a business transitions from one basis to another, transitional adjustments are required to ensure that any items of income are only taxed once and all items of expenditure are only relieved once. For example, a transition from the accruals to the cash basis might require an adjustment to write back the value of stock for which a deduction has already been claimed.

Massive impact on taxable profits

David Missen, a founder member of ICAEW’s Farming and Rural Business community, says: “Since farmers tend to carry proportionately large levels of stock, in some cases up to a year’s turnover, the implications are clear. Unless there are very high HP liabilities, the switch to a cash basis in 2024/5 will have a massive impact on taxable profits and may well turn a modest profit into a loss. 

“Thankfully, the cash basis rules relating to losses are also being amended. Losses calculated under the cash basis can now be set off against general income of the tax year of the loss or the preceding year.” 

Richard Jones, senior technical manager in ICAEW’s Tax Policy team, says: “Farmers with animal livestock will often use the ‘herd basis’, which allows them to calculate their tax liabilities based on an average of taxable profits over a specified five-year period. It is not possible to elect to use the herd basis under the cash basis, so taxpayers will need to make a choice as to which of the two regimes will benefit them the most.”

Period reform changes

Jones adds that the other recent change particularly affecting farmers is basis period reform, under which taxable profits will need to be calculated based on a pro-rata of results for accounting periods falling partly within each tax year. “This means that, even though the cash basis can give more certainty and simplicity around the profits for each accounting period, some farmers will need to wait until they have the results for the later accounting period falling within the tax year in order to calculate their tax liability for that tax year,” he explains.

“For example, if a business has an accounting period ended 30 September you would pro-rata that period roughly 50% to the tax year ending in that period and the rest to the following tax year. This pro-rating complexity could more than make up for the simplicity offered by using the cash basis.”

“Most businesses will still need accruals accounts for partnership or borrowing purposes, but they can be redrafted onto a cash basis for tax. Nonetheless, in many respects, “the ‘tax must follow accounts’ rule has been comprehensively broken”, Missen says.