Expanding the cash basis for the self-employed

LITRG broadly supports the proposals to expand the cash basis as we consider that the formal cash basis is a straightforward way of calculating profit for businesses for whom it is suitable. We think many low-income unrepresented businesses do not give much consideration to the basis on which they work out their accounts for tax purposes and are often unaware that there is a choice of two different methods- the accruals basis or the cash basis. This means there are likely to be many people using the cash basis without ticking the box on their tax return confirming that they are doing so and therefore take-up is likely to be higher than shown by the official statistics.

We think the use of a default cash basis and increasing the interest restriction threshold (providing it was sufficiently uprated) and relaxing loss relief restrictions may increase take-up of the cash basis.

We strongly recommend HMRC improves its general communications and guidance on the cash basis including additional information to help growing sectors in self-employment such as those trading through online platforms. We consider this improvement in guidance should be a priority even if changes to expanding the cash basis do not proceed.

We also consider the timing of introducing any change to the default basis is important. In particular, if the default was changed to the cash basis it would be helpful if it does not coincide with other significant changes for the self-employed such as Basis Period Reform in the 2024/25 tax year or the start of the roll-out of MTD in the 2026/27 tax year.

Our consultation response can be seen here