What is changing and why?
1 – Proposal to increase the turnover limit for the cash accounting basis
Cash based accounting is a simple method of calculating taxable profits for trading businesses with straight forward tax affairs. With cash based accounting, businesses only need to keep records of their income and expenditure, with profit before tax being calculated as income received less expenditure paid.
Currently, businesses can choose cash based accounting if their turnover is below the VAT threshold of £83,000. However due to the method’s popularity there has been demand for the turnover threshold to increase.
2 – Reforms to basis periods for the self-employed
The policy aim is to simplify the rules around basis periods and give people flexibility to change their accounting dates to suit their businesses giving a better understanding of their tax position and cash flow at all times.
Currently businesses are required to prepare accounts on an annual basis. Making Tax Digital will require people to report more regularly, at least quarterly.
Sole traders may choose accounting dates that fit in with other reporting obligations and individual preferences.
Shorter tax accounting periods may suit those with simple business affairs or those who want accounts to fit in with seasonal or fixed term sources of income.
3 – Reforming the capital/revenue divide within the cash basis
This will simplify rules for reporting capital and revenue expenditure and reduce complexity.
The plan is to remove the need to distinguish between capital and revenue expenditure for businesses using cash based accounting, making it easier to categorise expenditure.
Who does it affect?
Self-employed individuals and partnerships, their agents and representative bodies.