Reforming the cash basis expenditure rules
Updated 31 January 2017
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This publication is available at https://www.gov.uk/government/publications/cash-basis-treatment-of-capital/reforming-the-cash-basis-expenditure-rules
Who is likely to be affected
Individuals with income from self-employment or property, and partnerships of individuals with trading income within the turnover threshold for cash basis accounting.
General description of the measure
Current tax rules for calculation of profits under the cash basis don’t allow a deduction for expenditure of a capital nature unless such expenditure would qualify for plant and machinery capital allowances under the ordinary tax rules.
This means that taxpayers still need to consider firstly whether an item of expenditure is capital in nature, and secondly whether the expenditure would qualify for capital allowances.
This measure replaces the general disallowance of capital expenditure with a more limited disallowance of capital expenditure incurred in relation to assets which are not used up in the business over a limited period.
Policy objective
This measure provides a simple list of disallowed expenditure in order to simplify the rules for allowable deductions within cash basis accounting.
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 reforming the capital/revenue divide in the cash basis and simplified cash basis for unincorporated property businesses, was published on 15 August 2016 and ran until 7 November 2016.
The consultations were published as part of a collection on Making Tax Digital.
Detailed proposal
Operative date
The measure will have effect on and after April 2017.
Current law
Section 33, Part 2, of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA).
Proposed revisions
Legislation will be introduced in Finance Bill 2017.
A new section will be introduced in ITTOIA to replace the general prohibition on deduction for capital expenditure in calculating taxable profits using the cash basis with a more focused and limited prohibition on deduction for certain specified expenditure.
No deduction will be allowed for an item of capital nature incurred on, or in connection with the acquisition or disposal of a business or part of a business.
No deduction will be allowed for an item of capital nature incurred on, or in connection with the provision, alteration or disposal of:
- any asset that is not a depreciating asset
- any asset not acquired or created for use on a continuing basis in the trade
- a car
- land
- a non-qualifying intangible asset, including education or training
- a financial asset
The revisions include provisions to define:
- the scope of the exclusion in relation to land
- a ‘depreciating’ asset as having a useful life of up to 20 years
- intangible assets as taking their meaning from Financial Reporting Standard 105
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 have a negligible impact on the Exchequer. The final costing will be subject to scrutiny by the Office for Budget Responsibility.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
Individuals who use the cash basis may start deducting expenses they previously didn’t claim for, or they may stop deducting expenses that they previously thought they could not claim for.
Added certainty on what can and can’t be claimed as an expense may change the quantum and number of items that individuals are claiming as expenses:
- individuals may start deducting expenses they previously were not sure they could deduct
- they may stop deducting what they thought they could claim before
However, given that this behaviour could go both ways, netting out in aggregate, the overall effect is likely to be negligible.
Households are not expected to be impacted by this measure.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
This proposal is not expected to impact on equalities.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses.
An estimated 3.5 million unincorporated businesses, landlords and partnerships whose turnover falls under the cash basis threshold will be able to benefit from this measure.
Businesses will incur a negligible one-off cost of familiarisation with the new rules.
There will be negligible ongoing savings for these businesses through simplification of the rules for allowable deductions within cash basis accounting.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
Guidance for external customers and HMRC staff will be updated to reflect the changes as a matter of course.
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 Jack Banks on Telephone: 03000 593674 or email: john.banks1@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.