Increasing cash basis thresholds for unincorporated businesses
Published 31 January 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.
General description of the measure
Cash basis accounting (‘the cash basis’) is a simplified method for calculating taxable profits for trading businesses with straightforward tax affairs.
This measure increases the entry threshold for the cash basis from the VAT registration threshold (currently £83,000) to £150,000.
Policy objective
The measure will increase the cash basis entry threshold to allow more small business to benefit from the 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 4 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.
Detailed proposal
Operative date
The measure will have effect on and after 6 April 2017.
Current law
Chapter 3A, Part 2 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA).
Proposed revisions
Legislation will be introduced in Finance Bill 2017 to increase the threshold for the cash basis from £83,000 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.
Summary of impacts
Exchequer impact (£m)
| 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|
This measure is expected to decrease receipts by approximately £15 million over the scorecard. The final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at Spring Budget 2017.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
Individuals could switch from cash basis to general accepted accounting principles (GAAP) accounting annually depending on which system would result in lower profits. However, this incentive is low as there are transitional arrangements and administrative burdens that result from switching between systems.
This measure is aimed at individuals wanting to simplify their tax affairs and it is therefore unlikely that they would be switching between systems.
More self-employed individuals will be within the new cash basis thresholds, giving them the option to use this 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 be able to benefit from this proposal.
An estimated 135,000 additional small businesses will be eligible for the cash basis and benefit from the reduced complexity and administrative burden this basis provides.
Businesses will incur a one-off cost of familiarisation with the new rules and changing to the new basis of reporting.
Estimates of the number of businesses that are expected to take advantage of this measure and on-going impacts on administrative burdens will be finalised at the Spring Budget 2017.
Operational impact (£m) (HM Revenue and Customs 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, please contact Sean Rath on Telephone: 03000 591076 or email: sean.rath@hmrc.gsi.gov.uk.
Declaration
Jane Ellison MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.