Cash Basis – Tax Planning

Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.
While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.

Cash Basis – Tax Planning
The cash basis is one way of simplifying the preparation of accounts but in particular for smaller businesses.
There is a proposal that it becomes the default basis for preparing accounts going forward for sole traders and partners.
This is likely to lead in many cases to wildly fluctuating bottom lines as expenses are recognised in one year and the related income in another. This may also have an impact on the tax rate you pay with the resulting complication of payments on account being too low or too high. This could play havoc with cash flow.
The cash basis is simpler with no need for accruals, prepayments, opening and closing stock, and capital allowances. Accounts can be prepared purely from the bank statements on a cash-in-cash-out basis.
This will undoubtedly make for simpler, swifter quarterly reporting needed under MTD.
Dealing with stock is simpler under the cash basis so no more stock counts In future your stock will be accounted for at cost when purchased. The business owner will account for any stock taken from the business for their own use at cost rather than market value. Tax Planning Opportunities
The opportunities for tax planning and almost unbelievable in the context of the previous accrual system. Tax inspectors would have gone into orbit if you had tried to do what is now going to be the norm. It will be interesting to see if they have a change of heart before it becomes law.
The opportunities would appear to be largely around cash flow management. Control the flow of cash into and out of the business and control the taxable profits. Don’t collect debts until after the year end. Buy stock just before the year end. Control when you pay suppliers.
Where a business has a substantial unrelieved capital allowance sitting in the main pool, switching to the cash basis would see the whole amount released as an expense in the transition year, significantly reducing the tax bill that year.
Whether the cash or accruals basis will be most beneficial requires careful consideration.

Basis Period Reform – Change Your Year End
One of the decisions to be made as we go into the new basis of tax for sole traders and partners i.e. assessment of profits arising in a tax year is whether to change your year end to 31 March (or 5th April) to avoid having to apportion profits from multiple accounting periods. It will not save you any tax but it will make your tax administration easier in the future.
If your year end is currently anything other than 31 March (or 5 April) you will also suffer the effects of the acceleration of assessment of your profits as we transition between the old and new systems.
One question that arises is whether, if you change your year end to 31 March (or 5th April) 2024, do you still qualify for the spreading provisions, i.e. spreading the extra tax out over 5 years.
From 6 April 2024, a new “tax year basis” of assessment applies, with businesses taxed on the profits arising in each tax year, regardless of their accounting period end date.
The normal restrictions on changing accounting dates have been specifically disapplied from 2023/24 so that you can now draw up a set of accounts exceeding the usual 18 months to make the change in an accounting period.
It therefore doesn’t matter if you change your accounting period in 2023/24 or not and, as long as you had a yearend other than 31 March or 5 April in 2022/23 you are entitled to spread any excess profits brought into account.
You can therefore change your accounting period end to 31 March or 5 April in 2023/24 without fear of missing out on spreading.

HMRC Pays Peanuts
A third of civil servants at the tax office will be given an ‘uplift’ in pay to bring them above the National Living Wage threshold of £11.44 per hour, which came into force on 1 April.
HMRC is the government department responsible for enforcing minimum wage requirements.
Jim Harra is quoted saying “I am this month having to give nearly a third of my staff, including all the helpline advisers and the staff who work on the post teams, a rise so that they can stay with the national living wage… ‘That is the rate of pay I am giving those colleagues, which is not a position that I want to be in, but just in case people were left with the false impression that we pay people very high salaries, that is not the case.’
HMRC union members are currently voting on whether to take strike action over pay and conditions. The last time a vote was held in November 2022, there was unanimous support for strikes, one of which was held on the day of the Budget that month.
Another example of how a government agency has been habitually underfunded.

Tipping Rules
New rules on the taxation of tips are expected to come into effect from 1 October 2024.
The new law brings in an obligation on affected employers to ensure that the total amount of qualifying tips that are paid at, or otherwise attributable to, a place of business of the employer, are allocated fairly between workers.
Qualifying tips are those caught by the legislation and include both employer-received tips and certain worker-received tips where the employer or an associated person has some control over them. Qualifying tips must be allocated and distributed fairly among staff working in the business.
If on the other hand, the worker receives and keeps a tip, with no employer control or involvement, the tip is outside of the scope of the legislation.
Digital tipping, where a customer uses an app to directly tip members of staff, bypassing the employer altogether, is also out of scope.
A statutory Code of Practice has been created providing overarching principles on what fairness is, the areas in which employers need to make decisions to comply with their duties, and how they should apply these principles in their specific place of business.
A written policy is also needed where tips are paid, and it must include:
• whether the employer requires or encourages customers to pay tips; and
• how the employer ensures that all qualifying tips paid at, or otherwise attributable to, the place of business are dealt with, including how the employer allocates tips between workers.
The policy must be written in plain language, and employers must provide an accessible format for any worker with a disability, on request.

Missing Detail on Purchase Invoices
A construction company has won an appeal after the First Tier Tribunal ruled that limited information on purchase invoices was not a reason for HMRC to reject a VAT claim.
HMRC had rejected claims for recovery of input tax on the basis that the relevant invoices did not meet the relevant legislative requirements.
HMRC argued that the invoices did not include a description of the work undertaken and were therefore not legitimate as they did not meet the requirements set out in regulations.
The invoices did however include a VAT-exclusive subtotal, the VAT amount, and the overall total.
Regulation states that invoices must contain a description sufficient to identify the goods or services supplied and for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency.
Having reviewed the arguments, the tribunal judge stated: ‘We do not agree with HMRC’s suggestion that the invoice description needs to be in such detail as to enable HMRC to draw definitive views on the VAT treatment of the supply from the invoice alone.
‘We conclude that a general short description of the nature of the services (such as ‘building services’), along with some further identifying information such as the name of the site, the contract, or the date of works, will be sufficient to meet the requirements of regulation 14.’
The appeal was allowed.

Making Tax Digital for Corporation Tax
The MTD for Corporation Tax pilot scheme is now underway as of 1 April, marking the beginning of mandatory participation from April 2026.

MTD ITSA Pilot
HMRC is seeking tax agents and accountants to take part in the initial stage of the trial for Making Tax Digital for Income Tax Self-Assessment. This private Beta testing will be conducted from 22 April 2024 to March 2025.
The aim is to involve firms with self-employed clients or landlords who earn an annual income of more than £50,000.
From April 2026, all these individuals will be required by law to maintain digital records and provide quarterly updates of their income and expenses to HMRC using compatible software.
The system will later expand to include individuals with an annual income exceeding £30,000 from April 2027.

Raising Standards in the Tax Advice Market
A consultation is underway.
Proposing ideas to implement a mandate for all tax advisers to have professional indemnity insurance, it could lead to major adjustments for the industry.
Some of the main aspects under consideration are:
• potential ways to raise standards;
• whether the government should consider implementing a rule that mandates tax practitioners to be part of a reputable professional organisation overseeing their professional standards;
• ways professional bodies and the government can effectively collaborate to enhance standards of tax practitioners;
• which groups of tax practitioners should be in scope or excluded from the proposed option; and
• an initial step to make it mandatory for practitioners to register with HMRC on behalf of their clients, with added requirements that HMRC determine should be met for successful registration.

No Reprieve for Furnished Holiday Lets
The Chancellor Jeremy Hunt argued that the tax changes would free up more accommodation for locals and reduce the tendency to invest in short-term lets due to their favourable tax treatment.
According to the Treasury, they are not abolishing FHLs but the intention is for the tax reform to apply to all properties. Effective abolition. But they say that it is about levelling the playing field and there will still be tax incentives, but they will be the incentives available to all landlords.
One analysis of the impact is that it will affect the holiday letting industry and its estimated 50,000 jobs as well as raise £35m in 2025/26, increasing to £245m in 2028/29 for the exchequer.
From 6 April 2025, interest for businesses operated by individuals will cease to be a deduction and relief will instead be given as a 20% tax credit from the individual’s tax liability.
As investment assets, from 6 April 2025 gains on the sale of FHLs will be subject to the Capital gains tax (CGT) tax rate of 18% for profits within the standard rate band or 24% for profits within the higher rate band. Currently, these may qualify for the 10% rate.
Gains on the disposal of a furnished holiday let would currently qualify for CGT rollover relief with the gain on one property being rolled over into a replacement. This will cease from April 2025.
Expenditure on qualifying assets for a furnished holiday letting businesses are currently eligible for capital allowances. This will cease but you may instead be able to claim a deduction from profits for the cost of replacing domestic items.
Tax relief for pension contributions by individuals is currently limited to contributions of the higher of £3,600 or 100% of net relevant earnings. This source of income will not qualify in future when looking at limits for pension contributions.

Real Living Wage
This term is very confusing. The government sets the National Minimum wage (NMW) and the National Living Wage (NLW). The Real Living wage is a separate voluntary standard.
Becoming a real living wage employer can help attract staff, especially when operating in a low paying sector where wages are not typically that high. The real living wage is a voluntary initiative that employers can choose to join, which seeks to persuade employers that paying people more than the minimum wage is good for business.
The real living wage tries to reflect the actual cost of living.
This is in contrast to the National Minimum Wage and National Living Wage, which are the legal minimum pay employers must give.
The current hourly rates are £13.15 in London and £12 for the rest of the UK. This applies from the age of 18. The current rate of National Living Wage for over 21s is 11.44 per hour but it is only £8.60 for 18 to 20 year olds.
Adopting the Real Living Wage will need to be factored into your calculations for your hourly rates, and you will have to consider if this will affect your competitiveness.
Another consideration is that once a change to the real living wage has been implemented, it will not be straightforward to revert to NMW and NLW.

Non-Doms
In the UK there is a specific tax system which applies to individuals who are UK tax residents but not UK domiciled or deemed domiciled.
Jeremy Hunt has announced that the non-dom regime would be abolished and replaced by a new foreign income and gains (FIG) regime. It had been widely expected that if Labour were elected in the forthcoming election this would be a top priority for them, but the Chancellor beat them to it.
The new FIG regime allows individuals to not pay UK income tax and capital gains tax on their foreign income and gains whilst being UK tax residents for up to four tax years.
Qualifying individuals can opt into the FIG regime so that they will not be subject to UK tax on their FIG, irrespective of whether that FIG is remitted to the UK.
Individuals will be able to qualify for this regime if they have been tax residents in the UK for less than four years (after 10 consecutive years of non-UK tax residence). After these initial four years, the option to elect will be lost and the tax relief will no longer be available.
The Statutory Residence Test will be used to determine tax residence for any one tax year – treaty residence or non-residence and split years will be ignored.
Inheritance tax (IHT) is currently a domiciled-based system. The government intends to move IHT to a residence-based system from 6 April 2025.

Companies House – Your Registered Office
Companies must now have an ‘appropriate address’ as their registered office at all times. An appropriate address is one where:
• any documents sent to the registered office should be expected to come to the attention of a person acting on behalf of the company; and
• any documents sent to that address can be recorded by an acknowledgement of delivery.
This means that a PO Box cannot be used as a registered office address. A third-party agent’s address can be used if they meet the conditions for an appropriate address.
Companies that do not have an appropriate registered office address could be struck off the register.

Questions?
If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.

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