Expanding the cash basis for the self-employed

Question 1

Summary

Accepted Answer

Subject of this consultation

This consultation asks for views on how best to improve user experiences of reporting in Income Tax Self Assessment (ITSA) for small businesses by simplifying the rules and extending eligibility for the cash basis. The government recognises the benefits of this regime for businesses and is keen to seek views on proposals that aim to increase access to and use of the regime.

Scope of this consultation

This consultation outlines the current rules for the cash basis, sets out specific policy proposals and seeks views on their viability as well as what benefits they are likely to bring.

The proposals affect self-employed businesses with trading income. The proposals will not affect companies or property businesses. Affected groups are collectively termed ‘businesses’ in this document. The proposals mainly affect businesses currently eligible for the cash basis with turnover under £300,000: however proposals on the turnover threshold in Chapter 2 could mean that businesses that are currently not in the scope of the cash basis may be affected.

Who should read this

We would like to hear from businesses, particularly those who use or who would be eligible for the cash basis, their advisors, representative bodies, software providers, and other interested parties.

Duration

The consultation will run from 15 March 2023 to 7 June 2023.

Lead official

The lead official is T Brown of HM Revenue and Customs (HMRC).

How to respond or enquire about this consultation

Any responses to or queries about this consultation should be directed to T Brown by email. Please include ‘Cash basis’ in your email subject line.

Additional ways to be involved

HMRC officials are willing to meet in person or online to discuss any aspect of this consultation.

After the consultation

The government will consider whether to publish a summary of responses alongside any decision on the proposals.

Getting to this stage

The government announced at Budget 2023 that it would consult on expanding the cash basis, to explore ways to increase the number of eligible businesses and ways to increase use of the cash basis by eligible businesses.

Previous consultation

In 2012, the government ran a consultation, ‘Simpler income tax for the simplest small businesses’, on the cash basis and other income tax simplifications for small businesses. Following this consultation, the cash basis for trading income was introduced as part of the Finance Act 2013.

A consultation, ‘Simplifying tax for unincorporated businesses’, which included proposals to reform the cash basis, was published in 2016. A summary of responses to this consultation was published in 2017. As a result of the consultation, the government agreed to increase the cash basis entry threshold to a fixed amount of £150,000 and exit threshold to £300,000.

Question 2

Executive summary

Accepted Answer

This consultation seeks views and feedback on proposals to increase eligibility and use of the income tax cash basis for the self-employed. These proposals aim to increase the number of businesses able to benefit from the simplifications the regime offers, making the rules easier to apply and understand, and to help businesses spend less time filing their tax returns.

The cash basis is a simplified regime for calculating taxable profits for businesses with straightforward tax affairs. The regime allows businesses to calculate their taxable profit as the difference between income and expenditure when money is actually received or paid out. This eliminates accounting and tax complexities such as accruals and most capital allowances, and simplifies reporting.

Example:

A business accounting to 31 March invoices a customer for services performed on 12 February 2025 but does not receive the money until 30 April 2025.

Under the accruals basis, the business should record this as turnover and a trade debtor in their 2024 to 2025 tax return. The trade debtor entry will be converted to a cash/bank entry when payment is received in 2025 to 2026.

Under the cash basis, the business should only record the transaction when the payment is received, in their 2025 to 2026 tax return. This removes the need to file relevant accruals for the debtor and appropriately deal with those entries when payment is received.

Tax simplification is a priority for the government, and in particular for small businesses; simplifying the tax system helps to boost productivity, increase business confidence, and reduces the amount of time and money businesses spend on tax administration. The cash basis is an example of a successful tax simplification which has made the tax affairs of many small businesses more straightforward since its introduction in 2013, cutting down on the number of tax and accounting adjustments that small businesses are required to make, and making a business’s tax position easier to understand.

To continue to simplify the tax system further, and to make sure as many small businesses as possible are able to use the simplifications already on offer, the government is launching this consultation to expand and simplify the cash basis. The government recognises the benefits that the cash basis offers to small businesses, and views the regime as a valuable simplification.

However, more than two-thirds of eligible businesses, around 3 million self-employed people, do not currently use the cash basis even though the government thinks that many could benefit from its simplicity. There are also over 200,000 businesses that are not eligible to use the cash basis, and many more discouraged from using it, because of specific restrictions and limits imposed when the regime was originally introduced in 2013. Now that the regime is 10 years old and its value as a simplification has been demonstrated, the government is considering easing these restrictions and establishing the cash basis as the simpler default method of calculation for small businesses.

The government has identified a number of potential areas to simplify and expand the regime:

reviewing the turnover threshold for the cash basis could expand the simpler regime to larger unincorporated businesses, allowing more businesses to choose whether to use the cash basis, regardless of size
setting the cash basis to the default basis for eligible businesses could significantly increase take-up within the eligible population, setting it as the standard way to calculate taxable profits (unless a business opts out), thereby encouraging more businesses to use it. The cash basis is already the default method for property businesses, so setting it as the default for trades would align the 2 types of income
relaxing the interest restriction for businesses in the cash basis may widen access to the cash basis to businesses that have interest costs above £500 per year, allowing more businesses to benefit from the cash basis in the current interest rate and price environment
removing the restrictions on loss relief in the cash basis has the potential to further widen access, allowing new businesses to use the cash basis while setting loss relief against other sources of income; the government welcomes views on how losses could be made available with appropriate safeguards

These proposals have the potential to widen eligibility for the cash basis to almost all small self-employed businesses, and ensure that as many businesses as possible use the simpler regime where appropriate. This will reduce administrative burdens, freeing up more time for self-employed people to focus on running their business.

The government welcomes responses from all interested parties on any aspect of these areas, to better understand the effectiveness, viability, and impacts of the proposals. The government also welcomes views more generally on how the cash basis could be improved or expanded to give as many businesses as possible the opportunity to benefit from the simplification.

Question 3

1.  Introduction

Accepted Answer

Current rules

1.1. The cash basis can be used to report business income to HMRC by unincorporated trading businesses and some partnerships. Companies, limited liability partnerships, partnerships where there is a member who is not an individual, and some other small businesses are excluded from using the cash basis ^{[footnote 1]}. The cash basis is also the default method of reporting by property businesses carried on by individuals. In the rest of this document, the term ‘businesses’ refers to self-employed businesses with trading income, rather than other types of business that are able to use the cash basis such as property businesses.

1.2. The cash basis is optional for eligible businesses. Eligibility depends on 2 thresholds, the entry threshold and the exit threshold. A business can elect to use the cash basis if its total receipts in a tax year do not exceed the entry threshold. A business must leave the cash basis if its total receipts in an accounting period exceed the exit threshold, and if in the following period its total receipts are not below the entry threshold. In April 2017 the entry threshold was increased from £83,000 (the VAT threshold) to £150,000, making a larger number of businesses eligible to use the cash basis. The exit threshold is set as double the entry threshold, £300,000.

1.3. Eligible businesses are allowed to account for their trading income in the period when income is received and to account for expenses when payment is made. Certain capital expenditure, such as plant and machinery used for business purposes, is taken into account in calculating the taxable profits of a business using the cash basis ^{[footnote 2]}.

1.4. There are also transitional provisions available for businesses using the accruals basis (accounting for income and expenses when earned and incurred) who switch to the cash basis the following tax year or vice versa, to ensure accurate tax treatment of income, expenses and assets as businesses move between the regimes.

1.5. For businesses using the cash basis, allowable loan interest claimed as an expense of the business is capped to a maximum amount of £500. Losses incurred by businesses using the cash basis can only be carried forward to be set off against future profits from the trade or used as terminal relief when the business ceases trading. Trade losses cannot be set off against general income of the same period or carried back to set off against income from earlier years.

Background

1.6. The cash basis was introduced from April 2013; an estimated 1.2 million businesses currently choose to report to HMRC on this basis out of 4.2 million eligible businesses, giving a take up rate of 29%. Stakeholders have since called to make the cash basis available to a larger population, and in 2017, the government increased the entry threshold to £150,000 and exit threshold to £300,000.

1.7. The cash basis acts as a significant simplification for businesses as they do not need to draw up full accruals accounts at the end of the year, only needing to prepare cash accounts to work through to their tax position. This means that the business does not have to make accruals adjustments such as accruals and prepayments, debtors and creditors, and stock, and also means that the business does not have to draw up a full balance sheet.

1.8. Simplicity in the cash basis also comes from the number of tax adjustments that need to be made at the end of the year; unlike in the accruals basis, complex areas of tax law are either completely removed from the cash basis or almost completely removed. Tax concepts such as capital allowances which are useful for larger or more complex businesses are almost completely removed in the cash basis, leaving easy to understand full deductions for capital expenditure.

1.9. These 2 simplification factors combined mean that businesses using the cash basis can save significant time and money in either trying to draw up their own accruals accounts or in paying an accountant to do so. Under the cash basis, small businesses may be able to manage their tax affairs without using an accountant, or may be able to tailor the level of service that their accountant or software provides to an appropriate level for the size of their business. This means that the simpler cash basis, which in many cases provides a reasonable measure of the businesses’ profit for tax purposes, can save small businesses significant time and money compared to accruals.

1.10. The cash basis is also beneficial for the self-employed person running their business as it provides a simpler process to get from the cash transactions the business has in documents like bank statements to the end of year tax bill. This makes it easier to understand how a higher or lower tax bill might have come about because of transactions that took place during the year compared to accruals, where a business could be taxed on sales that have not yet been paid for. This helps businesses plan and predict their tax bill during the year, as periods of large cash incomings or outgoings more closely reflect the end of year tax position.

1.11. These simplification benefits come together to create a simpler and quicker process for businesses to reach their end of year tax position from business records; aside from saving time and money, this simpler process also means that businesses may be less likely to make errors in their tax return under the cash basis compared to the accruals basis. As there are fewer adjustments to make, and fewer tax rules to apply, there are fewer opportunities to misunderstand accounting practice or tax law and get something wrong in a tax return. This reduces the risk of businesses facing an unexpected higher tax bill after using an accountant to correct their mistake or HMRC taking action to correct the error.

1.12. Despite these simplification benefits, the government recognises that the cash basis may not be appropriate for all businesses, such as those with significant stock purchases or large debtor and creditor balances. However, the government would like to ensure that as many businesses as possible are benefitting from the cash basis where it is appropriate. The government is therefore considering proposals to expand the cash basis, to increase the number of eligible businesses and to increase take-up of the cash basis within the eligible population. This consultation explores these options for further change and asks you to comment on a number of policy proposals.

1.13. Any decisions on reporting simplifications for small businesses will need to be taken in light of overall government finances, as any reform must be both affordable and sustainable. The government keeps all policies under regular review to ensure effectiveness and is keen to seek views on the options identified to be assessed along with other considerations such as Exchequer costs.

Areas to be considered

1.14. The government is primarily considering reforms to 4 areas of the cash basis, aimed at expanding the eligible population, improving access to the cash basis, and increasing use of the cash basis within eligible self-employed businesses. The government also welcomes views on other areas of the cash basis that would benefit from reform.

1.15. The government is considering introducing these changes, which could be implemented relatively quickly, before the start of Making Tax Digital (MTD) for ITSA mandation. Other proposals or suggestions not outlined in this document may need to be developed over a longer timeframe if they are complex or require changes to the tax return.

1.16. Turnover restriction – businesses are only able to join the cash basis if their cash basis turnover is below £150,000, and are forced to leave the cash basis if their turnover exceeds £300,000. Increasing or removing these thresholds would give more unincorporated businesses the choice of using the cash basis, increasing the eligible population. The government is interested in views on the impacts of changing or removing these thresholds.

1.17. Cash basis default – the cash basis currently requires businesses to ‘opt in’ to the simplified regime to benefit from it. Making the cash basis the assumed, default option (with an opt-out) for trading income would set the regime as the ‘standard’ basis for eligible businesses, formalising informal use and encouraging more eligible businesses to use the simplified regime. The government is keen to seek views on the viability and impacts of setting the cash basis as the default for trading income.

1.18. Interest Restriction – when calculating taxable trade profits under the cash basis, a maximum deduction of up to £500 for interest and incidental costs of obtaining finance is allowable. Many businesses have interest expenses above this £500 limit, and are discouraged from using the cash basis as a result. The government is keen to seek views on the impacts of increasing this limit for businesses with trading income.

1.19. Loss restrictions – Losses incurred by businesses using the cash basis can only be carried forward to be set off against future profits from the trade or used as terminal loss relief when the business ceases trading. Trade losses cannot be set off against general income of the same period or carried back to set off against income from earlier years. The government is keen to seek views on removing or relaxing these restrictions to allow some losses while preventing abuse.

Question 4

2.  Policy options

Accepted Answer

Turnover restriction

2.1. The turnover threshold stops businesses larger than a certain size joining the cash basis, and forces businesses to leave the cash basis if they grow beyond a certain size. To join the cash basis, a business must have a cash basis turnover at or below £150,000, or £300,000 if the individual claims Universal Credit (UC). A person must leave the cash basis the year after the cash basis turnover from all of their trades exceeds £300,000; unless their turnover falls below the £150,000 (£300,000 for UC claimants) limit in that following year.

2.2. The government is considering expanding eligibility for the cash basis by increasing or removing these entry and exit turnover thresholds, giving more businesses the option of using the cash basis. Increasing the threshold would also reduce the number of businesses that are forced to make transitional adjustments as they grow out of the cash basis, allowing them to make their own decisions on when is best to move to accruals accounting.

2.3. The nature of the self-employed population means that there are relatively few businesses above the current threshold, and these businesses may be more complex, so more likely to prefer accruals accounting. This means that the number of businesses joining the cash basis after increasing or removing the threshold may be relatively low, leading to relatively small simplification benefits.

2.4. The government is primarily considering 2 proposals for the threshold:

to align the threshold with that used for the VAT cash accounting scheme, allowing businesses into the cash basis if they have turnover below £1.35 million, and being required to leave the basis if they have turnover above £1.6 million
to remove the turnover threshold entirely, allowing any size of business to use the cash basis as long as they are not otherwise prevented from joining

The government is, however, open to other suggestions for where to set the threshold for the cash basis.

2.5. HMRC estimates that for both options, the eligible population for the cash basis would increase by approximately 26,000 businesses.

Question 1a: Under either of the proposals, would businesses with more than £150,000 turnover consider moving to the cash basis?

Question 1b: What are the benefits/disbenefits of aligning the threshold to the VAT cash accounting scheme, and what are the benefits/disbenefits of removing the threshold entirely?

Question 1c: Would increasing the cash basis threshold encourage businesses currently below the threshold to move into the cash basis, knowing that they would be able to stay in it for longer if their business grew? Would this have a significant or minor effect on businesses?

Question 1d: Are there any alternative changes to the entry or exit thresholds that would also increase the eligible population and encourage businesses to join the cash basis?

Cash basis default

2.6. The use of the cash basis is optional for trading income, requiring an active decision by a business to opt in to the simpler regime. This is usually done through the self-employment pages of the self-assessment tax return by ticking the cash basis box. There are approximately 4.2 million self-employed businesses that are eligible to use the cash basis, of which 1.2 million businesses currently use it – a take up rate of 29%. This leaves the majority of eligible businesses, around 3 million, that are eligible for the cash basis but do not choose to use it.

2.7. Many eligible businesses find the accruals basis more suitable or appropriate for their own business needs, so choose not to use the cash basis. However, many eligible businesses may benefit from the simpler cash basis but do not make the active decision to use it, meaning that they are incurring higher-than-necessary administrative burdens.

2.8. Businesses that would benefit from the cash basis may not choose to use it for a variety of reasons. Some businesses may be concerned about using a method of accounting that is not the ‘standard’ or current default even where using the cash basis would be beneficial or save money. Some businesses may have started trading on the accruals basis and are simply carrying on with the method they started with. In other cases, some businesses may not be aware of the cash basis and its potential benefits; this means that rather than actively choosing not to use the cash basis, many may not know that there is a choice that can be made.

2.9. There also appears to be a substantial number of businesses that use the cash basis but have difficulties with the election itself. Many businesses are submitting tax returns on the cash basis, but have not made an election to do so, and many businesses with previous cash basis elections do not consistently tick the box on their tax returns, appearing to drop in and out of the cash basis as and when they remember to tick the box. For example, between the 2019 to 2020 and 2020 to 2021 tax year, 1.3 million businesses appeared to move from the cash basis to the accruals basis. This apparent movement is larger than the current population of cash basis users; we cannot be sure whether these businesses actually moved from one basis to the other, or simply forgot to tick the box in their return.

2.10. The government is considering whether to set the cash basis as the ‘default’ method of calculating trading income for eligible businesses. This would mean that businesses would use the cash basis as standard, without having to make an active decision to move into the simpler regime. As some businesses find the accruals basis more suitable for their needs, under a cash basis default it would still be possible to opt-out and use accruals, or switch between the 2 methods depending on the needs of the business.

2.11. A cash basis default would aim to increase take up of the cash basis in the eligible population, with the expectation that a proportion of the 3 million remaining eligible businesses would not opt-out and so stay in the simpler regime. Setting the cash basis as the default would make the regime the ‘standard’ method of tax calculation for eligible businesses, helping to reduce any apprehensions that businesses have about its use. It would mean that new businesses would start trading on the simpler basis, allowing them to focus on starting trading instead of preparing full accruals accounts. This would formalise the behaviour of the businesses that do not make elections to use the cash basis but do so informally, and would stop businesses appearing to fall into and out of the cash basis by forgetting to tick the box on their return. A default could operate through a reversal of the box currently used in tax returns, by asking businesses to tick the box if they have used the accruals basis in that year rather than asking if they used the cash basis.

2.12. Since its introduction in 2017 the cash basis has been the default basis for property businesses that are eligible to use it. Making the cash basis the default for trading income would align with the position for property income.

2.13. As a change in the default accounting basis would be a fairly wide-ranging change, potentially affecting how millions of businesses would complete their self-assessment returns, the government expects that any change in the default accounting basis would have to be accompanied by significant communications and education materials to ensure that affected businesses understood the change and their options for choosing to use the accruals basis instead of the cash basis.

Question 2a: Many businesses that would benefit from the cash basis currently do not use it, and many use it without electing to do so. Do you have any insight into why many businesses in the eligible population do not use the cash basis?

Question 2b: Would changing the cash basis to the default for trading income have an impact on whether businesses use the cash basis or accruals basis? What are the benefits or drawbacks of setting the cash basis as the default?

Question 2c: Under a cash basis default, what proportion of businesses would you expect to opt-out and use the accruals basis?

Question 2d: Would you expect there to be a transition administrative burden for businesses brought into the cash basis by the default, and are there any changes to the transition process for entering the cash basis that could help to smooth any burdens?

Question 2e: To what extent would businesses need help and support with understanding the change from the default accruals basis to the cash basis?

Interest Restriction

2.14. Under the accruals basis, businesses with trading income can get deductions for interest and the incidental costs of finance if they are incurred wholly and exclusively for the purposes of the business.

2.15. If a business uses the cash basis, restrictions apply that significantly alter the treatment of interest. Deductions for payments of interest on a loan are generally prohibited in the cash basis, subject to 2 exceptions:

a deduction of up to £500 is allowed for interest and incidental costs of obtaining finance, which would otherwise be disallowed due to the general rule or because it was not wholly and exclusively for business purposes
where the payment of interest is on borrowing used to fund purchases, provided the purchase itself is an allowable expense – such as trade credit charged by suppliers, hire purchase interest, or credit card interest. Only the business proportion of these types of interest payments are allowable deductions

The government is looking at the first of these rules, the £500 maximum deduction for interest payments and incidental costs of finance.

2.16. The £500 maximum deduction provides simplicity in saving businesses from having to draw distinctions between the business and personal elements of loan or overdraft financing. However, it dissuades businesses with interest payments larger than £500 from joining the cash basis where they otherwise would have benefitted from its general simplicity. Approximately 98,000 businesses are eligible to use the cash basis on turnover, but use the accruals basis and deduct interest expenditure above £500.

2.17. The recent environment of rising interest rates may start, or may have started, to put pressure on the £500 limit for interest deductions, which was originally set in 2013. Increasing costs of loan finance may mean that some businesses are pushed out of the cash basis because of the £500 restriction, and some new businesses may choose not to join the cash basis. As the rules for the restriction allows deductions for interest payments that are not wholly and exclusively for the purposes of the business, the government also recognises the potentially distortive effects of the limit in allowing mixed-purpose costs of borrowing through the cash basis as deductions against business profits.

2.18. The government is considering increasing the interest restriction to reflect the higher costs of borrowing since 2013, and to expand the number of businesses that are able to use the cash basis without being dissuaded by the £500 restriction. The government is currently considering options for increasing the limit to £625, £750, and £1,000, but welcomes suggestions on an appropriate level for the limit.

Question 3a: What would be an appropriate level to set the interest restriction? Are any of the 3 options proposed an appropriate level, considering the balance between allowing up-to-date costs of financing and the distortive effects of allowing any private element of borrowing costs as deductions?

Question 3b: To what extent would increasing the interest restriction in the cash basis have an effect on whether businesses choose to use the cash basis or not? Does the interest restriction influence decisions to join the cash basis where a business has interest costs below the £500 limit?

Question 3c: To what extent would you expect businesses currently using the cash basis to increase their interest deductions, either through further borrowing or not being limited by the current £500 maximum?

Question 3d: Is the form of the current interest restriction appropriate for the cash basis? Are there any changes to the interest restriction rule itself, aside from changes to the limit, that would help to increase the number of businesses that are able to use the cash basis while allowing appropriate deductions for interest costs?

Loss restrictions

2.19. Where trade losses are generated under the accruals basis, individuals have a range of options for relief. Losses from a trade whose profit is calculated under the accruals basis can be set against general income of the same or previous years, against later profits of the same trade, against capital gains, and in particular ways when the business starts or ceases. Under the cash basis, loss relief is restricted, meaning that individuals are only able to use cash basis losses against profits from the same trade, preventing the use of cash basis losses against other trades or general income such as employment.

2.20. After the cash basis was introduced, the general reliefs cap (S24A ITA2007) was introduced in 2013 to restrict the amount of certain reliefs that an individual can claim against their general income in a tax year. This cap limits individuals to a maximum deduction of £50,000 or 25% of ‘adjusted total income’, whichever is larger, in certain sideways loss reliefs. Currently, cash basis users are unable to access reliefs restricted by this rule, so are not affected by it.

2.21. Easing or removing the restrictions on trade loss relief for the cash basis, to move the treatment of losses closer to what would be seen under the accruals basis, would allow commercial businesses that are making losses in the cash basis to get tax relief against other income for those losses. This would bring the cash basis into line with other aspects of the income tax system, where genuine economic losses are allowed as tax relief against other sources of income. This could particularly help new start up businesses, where someone has another source of income that they could set their cash basis losses against while establishing a new business.

2.22. Approximately 94,000 taxpayers with trading income are eligible to use the cash basis based on their turnover, but claim sideways loss relief. If loss restrictions were eased, it is expected that some of these businesses would move into the cash basis.

2.23. Businesses making trade losses and wishing to set these off against other sources of income have so far been required to move out of the cash basis into the accruals basis to be able to use these losses. This creates an additional administrative burden as businesses must use the transition calculations to leave the cash basis in order to access their losses. New businesses that expect to make losses during their early years of trade may choose not to use the cash basis to be able to set their losses against other sources of income, even where the cash basis would be a worthwhile simplification for the business to use.

2.24. The government is considering a range of options for removing loss relief restrictions in the cash basis, and it welcomes further views on how the loss relief rules for the cash basis could be changed to increase eligibility and use of the cash basis. However, the government is keen to ensure the potential compliance and avoidance risks of allowing additional loss relief (subject to the general reliefs cap) is balanced appropriately with the potential benefits to business of increased cash basis use and eligibility.

2.25. Changes to the cash basis loss rules could set a specific limit on the amount of cash basis losses that could be used as sideways loss relief, could limit relief to businesses in the early years of trade, could restrict the use of losses to other cash basis sources of income, or could apply conversion rules to ensure that relief against accruals sources was appropriate. Any change that did not apply the standard accruals rules for losses or introduced a particularly complex restriction on the use of losses would have to be considered carefully to ensure that the simplification aims of the cash basis were being met.

Question 4a: Would removing or relaxing the cash basis trade loss relief restrictions have an effect on whether businesses with losses choose to use the cash basis?

Question 4b: Is the burden of moving out of, and then back into, the cash basis to claim sideways loss relief currently influencing businesses’ decisions to use the cash basis?

Question 4c: Are the restrictions on loss relief under the cash basis dissuading new businesses, that may be making losses in their early years of trade, from using the cash basis?

Question 4d: What changes to the loss relief restrictions for the cash basis do you think would have the greatest effect on the number of businesses that would be eligible for, and use, the cash basis?

Interactions and other improvements to the cash basis

2.26. The government is interested in the interactions between the policy proposals suggested above and whether a combination of some or all of the measures would significantly increase the number of businesses using the cash basis. In particular, the government is interested in the potential interactions of the cash basis default with the other proposals, particularly if the cash basis default were to be implemented without, for example, allowing some form of sideways loss relief for affected businesses. In addition to the interactions between the policies, the government is also interested in the practical outcomes that these proposals would provide for small businesses, and the impacts that these changes could have more generally on supporting small businesses.

2.27. The government is also interested in any interactions between these proposed changes to the trading income cash basis and the property income cash basis. Some of these proposals would align trading income with property income, such as the cash basis default, but others could create new misalignments between the 2.

2.28. This consultation document has also focused on trading income for self-employed businesses; as changes to the trading income cash basis would also affect partnerships with trading income, the government is interested in views on the impacts on partnerships of these proposals, and whether any of the changes should not be applied for those categories of partnerships that use the cash basis.

2.29. The government is also keen to hear views on any other areas where the cash basis could be improved, to encourage more businesses to use the cash basis and to make the cash basis itself easier to use. For example, the government has received suggestions that allowing an optional end of year adjustment for stock could encourage businesses to use the cash basis that might not have seen it as a suitable way of calculating their profits in the past. The government has also heard that there may be opportunities to more closely align the cash basis rules for income tax with the cash basis used to measure income for UC purposes.

Question 5: Are there any specific interactions, benefits, or issues that could arise from a combination of some or all of the proposals outlined in this consultation document?

Question 6: Are there any other areas of the cash basis that could be modified or improved to increase eligibility, take up, or simplicity?

Question 7: Would allowing an optional end of year adjustment for stock in the cash basis be a feasible or helpful addition, and would it encourage more businesses to use the cash basis?

Question 8: Are there any opportunities to more closely align the rules for measuring self-employment income under Universal Credit with the self-employed cash basis? Would closer alignment encourage more people to use the cash basis, or provide simplification benefits for people already using the cash basis?

Question 9: Are there any non-legislative changes that could be made to improve understanding and use of the cash basis for eligible businesses? Would an education campaign to inform small businesses of the cash basis encourage more to use it, even without changes to the cash basis itself?

Question 10: Could any of the proposals or ideas in this consultation document for reforming the cash basis be applied to income from property businesses? Would increasing or maintaining alignment between the trading income cash basis and property income cash basis have an effect on simplicity or take up?

Question 11: Any changes to the trading income cash basis would automatically apply to partners in partnerships that use the cash basis; are there any particular issues that should be taken into account when considering the impact of these changes on partnerships, and should any of these proposed changes not apply to partnerships?

Interactions with MTD for ITSA

2.30. In December, the government announced a phased approach to the introduction of MTD for ITSA, recognising that the transition to MTD for ITSA represents a significant change for taxpayers, their agents, and for HMRC

2.31. This phased approach allows more time to prepare, so that all businesses, self-employed individuals, and landlords within scope of MTD for Income Tax, but particularly those with the smallest incomes, can adapt to the new ways of working.

2.32. The government is introducing MTD for ITSA on a phased basis, with businesses, self-employed individuals, and landlords with income over £50,000 mandated to join first, in April 2026. Those with income over £30,000 will be mandated from April 2027.

2.33. As part of this phased approach, the government is reviewing the needs of smaller businesses for MTD for ITSA, and in particular for businesses under the £30,000 threshold. The government is looking in detail at whether and how the design of MTD for ITSA works with the needs of small businesses, and at the best way for these businesses to meet their income tax obligations.

2.34. While the government’s proposals on the cash basis go wider than businesses affected by MTD, the government is eager to hear respondents views on any interactions between changes to the cash basis and MTD for ITSA.

2.35. The government’s initial assessment is that regular quarterly updates in MTD will more easily align with the simplified cash basis regime, as in-year transactional data has a much closer link to the end of year tax position under the cash basis than the accruals basis. In the same way that the cash basis reduces the number of adjustments needed to business records under the current income tax system, the cash basis reduces the number of adjustments needed to quarterly updates at the end of the year under MTD. The cash basis and MTD work well together to provide a very simple and straightforward end of year process for businesses to reach their final tax position, as all of their cash transactional data will be available from quarterly updates.

2.36. In the cash basis, the closer link between a business’s transactions and its end of year tax position means that voluntary in-year tax estimates, based on cash transaction quarterly update data, may be more relevant to customers than under the accruals basis. MTD voluntary estimates may more effectively predict a small business’s end of year tax bill in the simpler cash basis, helping businesses to forecast their liabilities and plan ahead. Bringing more businesses onto the cash basis may mean that more businesses can benefit from these features of MTD for ITSA.

2.37. Businesses mandated into MTD or voluntarily doing MTD will continue to be able to use accruals or cash basis under any proposal set out here.

Question 12: What other interactions between reforms to the cash basis and MTD for ITSA should the government take into consideration?

Question 13: What is your view on whether encouraging/expanding the cash basis will improve sole traders’ experience of MTD for ITSA, particularly for very small businesses, and why?

Question 5

3.  Assessment of impacts

Accepted Answer

Summary of impacts

Year	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027
Exchequer impact (£m)	–	–	–	–	–	–

Exchequer impact assessment

The Exchequer impact will be estimated following consultation, final scope and design of the policy and will be subject to scrutiny by the Office for Budget Responsibility.

Impacts	Comment
Economic impact	The economic impacts will be identified on any proposals that are taken forward following consultation.
Impact on individuals, households and families	There are expected to be no separate impacts for individuals at present. Any future impacts will be fully examined and detailed.
Equalities impacts	It is not anticipated that there will be impacts for those in groups sharing protected characteristics by launching the consultation. A full equality impact assessment is not recommended at this point. Any future impacts will be fully examined and detailed.
Impact on businesses and Civil Society Organisations	The impacts on businesses will be fully examined in the future.
Impact on HMRC or other public sector delivery organisations	HMRC would need to make changes to its IT systems to support safe and timely delivery of this policy. There is also likely to be impact on HMRC contact centres in supporting taxpayers adjust to some of the proposals being consulted on. There is likely to be an impact on MTD. The extent of the required changes and impacts will depend on the proposals that are eventually taken forward.
Other impacts	Other impacts have been considered and none has been identified at this stage. Other impacts will be considered in future.

Question 6

4.  Summary of consultation questions

Accepted Answer

Turnover restriction

Question 1a: Under either of the options, would businesses within the newly-eligible population consider moving to the cash basis?

Question 1b: What are the benefits/disbenefits of aligning the threshold to the VAT cash accounting scheme, and what are the benefits/disbenefits of removing the threshold entirely?

Question 1c: Would increasing the cash basis threshold encourage businesses currently below the threshold to move into the cash basis, knowing that they would be able to stay in it for longer if their business grew? Would this have a significant or minor effect on businesses?

Question 1d: Are there any alternative changes to the entry or exit thresholds that would also increase the eligible population and encourage businesses to join the cash basis?

Cash basis default

Question 2a: Many businesses that would benefit from the cash basis currently do not use it, and many use it without electing to do so. Do you have any insight into why many businesses in the eligible population do not use the cash basis?

Question 2b: Would changing the cash basis to the default for trading income have an impact on whether businesses use the cash basis or accruals basis? What are the benefits or drawbacks of setting the cash basis as the default?

Question 2c: Under a cash basis default, what proportion of businesses would you expect to opt-out and use the accruals basis?

Question 2d: Would you expect there to be a transition administrative burden for businesses brought into the cash basis by the default, and are there any changes to the transition process for entering the cash basis that could help to smooth any burdens?

Question 2e: To what extent would businesses need help and support with understanding the change from the default accruals basis to the cash basis?

Interest restriction

Question 3a: What would be an appropriate level to set the interest restriction to? Are any of the 3 options proposed an appropriate level, considering the balance between allowing up-to-date costs of financing and the distortive effects of allowing private borrowing costs as deductions?

Question 3b: To what extent would increasing the interest restriction in the cash basis have an effect on whether businesses choose to use the cash basis or not? Does the interest restriction influence decisions to join the cash basis where a business has interest costs below the £500 limit?

Question 3c: To what extent would you expect businesses currently using the cash basis to increase their interest deductions, either through further borrowing or not being limited by the current £500 maximum?

Question 3d: Is the form of the current interest restriction appropriate for the cash basis? Are there any changes to the interest restriction rule itself, aside from changes to the limit, that would help to increase the number of businesses that are able to use the cash basis while allowing appropriate deductions for interest costs?

Loss restrictions

Question 4a: Would removing or relaxing the cash basis trade loss relief restrictions have an effect on whether businesses with losses choose to use the cash basis?

Question 4b: Is the burden of moving out of, and then back into, the cash basis to claim sideways loss relief currently having an effect on businesses’ decisions to use the cash basis?

Question 4c: Are the restrictions on loss relief under the cash basis dissuading new businesses, that may be making losses in their early years of trade, from using the cash basis?

Question 4d: What changes of the loss relief restrictions for the cash basis do you think would have the greatest effect on the number of businesses that would be eligible for, and use, the cash basis?

Interactions and other improvements to the cash basis

Question 5: Are there any specific interactions, benefits, or issues that could arise from a combination of some or all of the options outlined in this consultation document?