The cash basis for calculating trading profits and losses recognises income as it is received rather than earned; and expenses as they are paid rather than incurred. It is considered simpler than the accruals method and provides automatic relief for bad debts.
From 2024/25 the cash basis will be the default method of calculating trading profits for the self-employed and partnerships consisting wholly of individuals. There will be no limit on turnover, allowing small businesses to continue to use the cash basis as they expand. The £500 limit for interest costs will be abolished, as will restrictions on relief for trading losses calculated under the cash basis.
Businesses will be able to elect to use the accruals basis, but will always have the option to revert back to the cash basis if that is more favourable.
The off-payroll working rules (often referred to as “IR35”) apply to situations where self-employed individuals or those working through an intermediary, such as a personal service company (PSC), are effectively an employee of the client in all but name. This anti-avoidance measure calculates the tax and NIC that would have arisen under PAYE if the fees had been correctly classified. This tax and NIC is collected from the employer – often the end client.
Currently, there is no mechanism to set off the tax and NIC actually paid by the worker/intermediary against the tax due from the employer. This means the employer is bearing the full cost of non-compliance and could result in HMRC taxing the same income twice if the worker/intermediary is unable to claim a tax repayment.
The Chancellor has proposed that from 6 April 2024, HMRC will be able to set off income tax and NIC already paid by the worker/intermediary against the PAYE payment due from the employer, with provisions for estimates to be used where the actual tax/NIC paid are not known.
Making Tax Digital (MTD)
When (if) MTD is introduced for landlords and the self-employed, requirements for quarterly reporting will be simplified. Each quarterly update will be a cumulative total of income received and expenses paid during the year-to-date, avoiding the need to resubmit a previous update if corrections are required.
In addition, there will no longer be a requirement to submit an End of Period statement showing the accounting and tax adjustments. Instead, these will be made on the final declaration for all income sources – the equivalent of the annual tax return.