Increase to the cash basis threshold for unincorporated businesses
Published 8 March 2017
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Who is likely to be affected
Self-employed and partnerships of individuals with trading income within the cash basis thresholds will be given the choice to use the simplified cash basis of calculating profits.
General description of the measure
Cash basis accounting (‘the cash basis’) is an optional and simplified method for calculating taxable profits for trading businesses with straightforward tax affairs.
This measure increases the entry threshold for the cash basis from £83,000 (cash basis threshold for 2015 to 2016) to £150,000.
Policy objective
The measure will increase the cash basis entry threshold to give more small businesses the choice to benefit from the cash basis simplification.
Background to the measure
At Budget 2016, the government announced that it would explore options to simplify the tax rules for businesses, self-employed people and landlords.
A consultation covering four discrete areas of simplifying tax paid by unincorporated businesses, including the extension to the cash basis threshold, was published on 15 August 2016 and ran until 7 November 2016.
The consultation was published as part of a collection on Making Tax Digital.
This tax information and impact note (TIIN) updates the TIIN published on 31 January 2017.
Detailed proposal
Operative date
The measure will have effect on and after 6 April 2017.
Current law
Legislation on cash basis for small businesses, including when a person may make an election to use the cash basis, is set out here:
Chapter 3A, Part 2 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA)
Proposed revisions
Legislation will come into force on 6 April with effect for the tax Year 2017 to 2018 which will increase the threshold for the cash basis from £83,000 (cash basis threshold for 2015 to 2016) to £150,000.
The exit threshold will continue to be set at double the entry threshold, so it will increase to £300,000.
The entry and exit threshold for self-employed Universal Credit claimants will continue to equal the exit threshold of non-Universal Credit claimants and will increase to £300,000.
This will be implemented through secondary legislation, a draft of which was published on 31 January 2017.
Summary of impacts
Exchequer impact (£million)
| 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|
| negligible | -20 | -65 | -150 | -45 |
These figures are set out in Table 2.1 of Spring Budget 2017 as ‘Making Tax Digital: one year deferral for businesses with turnover below VAT threshold’ and combines ‘Making Tax Digital: deferral for businesses with turnover less than VAT threshold’ and ‘Making Tax Digital: Increase cash basis’, which have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2017.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
More self-employed individuals will be within the new cash basis thresholds, giving them the option to benefit from this simplified method of calculating taxable profits.
The measure is not expected to impact on family formation, stability or breakdown.
Households are not expected to be impacted by this measure.
Equalities impacts
This proposal is not expected to impact on equalities.
Impact on business including civil society organisations
Self-employed individuals and small businesses with revenue within the new cash basis thresholds will have the option to benefit from the simplified method of calculating profits.
This measure is expected to have a significant impact on businesses. An estimated 135,000 additional small businesses will be eligible to choose the cash basis for their business, with 87,000 estimated to take up that choice. They will benefit from the reduced complexity and administrative burden using the cash basis provides.
Businesses will incur a one-off cost of familiarisation with the new rules and changing to the new basis of reporting. On-going savings result from reduced complexity due to less detailed records being required to be kept, and a simpler calculation. The savings are set out in the compliance cost table below. There is no impact on civil society organisations.
Estimated one-off impact on administrative burden (£million)
| One-off Impact | (£million) |
|---|---|
| Costs | negligible |
| Savings | - |
| Net impact on annual administrative burden | negligible |
Estimated ongoing impact on administrative burden (£million)
| Ongoing average annual impact | (£million) |
|---|---|
| Costs | negligible |
| Savings | 0.5 |
| Net impact on annual administrative burden | -0.5 |
Operational impact (£million) (HMRC or other)
Guidance will be updated to reflect the changes as a matter of course and no further considerations were identified.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
Ongoing monitoring on the cash basis will take place through the information collected on tax returns.
Further advice
If you have any questions about this change, contact Sean Rath on Telephone: 03000 591076 or email: sean.rath@hmrc.gov.uk.