Expanding the cash basis for the self-employed
Executive summary
- AAT is not convinced the proposed changes will do much to encourage businesses to switch to the cash basis. While the changes may go some way to encourage businesses to switch, there is ultimately not enough of a financial incentive for businesses to change their accounting method.
- The cash basis is not suitable for every sector so making the cash basis the default is not an effective solution. HMRC should acknowledge that for some sectors, like construction, the cash basis is not suitable and should not be encouraged. Making the cash basis the default would unlikely have much impact in any case.
- Accountants prefer the accruals basis which can sometimes be easier than the cash basis. Businesses with accountants will therefore be unlikely to change from the accruals basis, especially if there is no discernible financial benefit.
- If HMRC wanted to drive up use of the cash basis, it should remove interest restrictions for legitimate borrowing. This would offer a significant financial incentive for businesses to switch to the cash basis, despite the administrative burden that comes with transferring to the basis.
- HMRC’s own admission that these changes could impact Making Tax Digital (MTD) and customer services is concerning. There are already significant issues and delays with MTD and HMRC service levels are the major source of frustration with AAT members currently. HMRC must consider fully whether any of these changes are worth the risk of further disruption.
- Government needs to set out clearly what it means by simplification. The proposals follow a list of other reforms which have inconsistent interpretations of what the goal of simplification actually means. There needs to be a clearer guiding principle set out by government on what simplification is that tackles the root problem of the current complexity in the tax rules.
Related consultation responses
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AAT acknowledges that a digital by default approach is a sound principle, but the reforms risk the customer-facing element not being supported end to end.
Property income review: call for evidence
While we appreciate that a single tax regime for all types of lettings would be simpler, it seems reasonable that different tax regimes should apply to each.
