MTD – Simplifying tax for unincorporated businesses

MTD – Simplifying tax for unincorporated businesses

The possibility of increasing cash basis accounting is suggested as a way to simplify compliance.

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This consultation looks at overall simplifications in compliance with Making Tax Digital (MTD) with the possibility of increasing cash basis accounting discussed. The overall aim of simplifying the tax system is considered by increasing the cash basis threshold. The current threshold is the VAT threshold (£83,000) and the proposals discuss new options, including doubling the amount to £166,000. The consultation also includes reforms to basis period rules and discusses the simplification of the capital versus revenue distinction.

Cash basis

Cash basis accounting is a method of calculating business profits looking only at what cash has come in to the business and what cash has been paid out. It does not require the use of accruals based accounting concepts. Currently those businesses with turnover less than the VAT registration threshold (£83,000) can use the cash basis rather than using GAAP accounting. Comments are welcomed by HMRC on what the new threshold should be. Doubling this to £166,000 would include an extra 175,000 businesses in the scheme. Other thresholds ranging from £100,000 to £150,000 are also suggested. 

Basis Periods

Currently when a business starts trading there are specific basis period rules that govern calculation of the early year profits. These rules known as basis periods often result in some profit being taxed twice (overlap profits). 

This consultation considers eliminating basis periods and overlap profits by proposing to tax profits in the early years based on accounting periods. An accounting period would begin when the company starts to trade and end, on the earlier of 12 months from the beginning of the accounting period, the accounting date of the company, or when the company ceases to trade. So the longest possible accounting period would be 12 months. All profits attributed to accounting periods ending in that tax year would be aggregated and taxed appropriately. 

Capital v Revenue

Cash basis accounting should simplify the distinction between capital and revenue in that prima facie all cash paid out should be relievable in the year it is paid. The exception HMRC are proposing is that assets which store value be treated as capital and so not relievable.  

Closing date

The closing date for responses to this consultation is 7 November 2016. 

Please contact us using the details below if you would like any further information on this consultation or our response.

Patrick Martin

+44 20 73115709

Patrick.Martin@kpmg.co.uk

Seamus Murphy

+44 20 73114330

Seamus.Murphy@kpmg.co.uk

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