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Finance Bill


Finance Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

166

 

31B     

Relevant maximum

(1)   

For the purposes of section 31A there is a “relevant maximum”

applicable for a tax year in relation to a trade, profession or vocation

carried on by a person if any of conditions A to C is met.

(2)   

Condition A is that an election under section 25A did not have effect

5

in relation to the trade, profession or vocation for the previous tax

year.

(3)   

Condition B is that the aggregate of the cash basis receipts of each

trade, profession or vocation carried on by the person during the

previous tax year is greater than an amount equal to twice the VAT

10

threshold for that previous tax year.

(4)   

Condition C is that, in a case where the person is either an individual

who controls a firm or a firm controlled by an individual, the

aggregate of the cash basis receipts of each trade, profession or

vocation carried on by the individual or the firm during the previous

15

tax year is greater than an amount equal to twice the VAT threshold

for that previous tax year.

(5)   

If there is a relevant maximum applicable for a tax year, the amount

of the relevant maximum is—

(a)   

the VAT threshold, or

20

(b)   

in the case where the person is an individual who is a

universal credit claimant in the tax year, an amount equal to

twice the VAT threshold.

(6)   

For the purposes of this section, where the basis period for a tax year

is less than 12 months, the VAT threshold is proportionately

25

reduced.

(7)   

In this section—

“universal credit claimant”, in relation to a tax year, means a

person who is entitled to universal credit under the relevant

legislation for an assessment period (within the meaning of

30

the relevant legislation) that falls within the basis period for

the tax year,

“the relevant legislation” means—

(a)   

Part 1 of the Welfare Reform Act 2012, or

(b)   

any provision made for Northern Ireland which

35

corresponds to that Part of that Act, and

“the VAT threshold”, in relation to a tax year, means the amount

specified at the end of that tax year in paragraph 1(1)(a) of

Schedule 1 to VATA 1994.

(8)   

The Treasury may by order amend this section.

40

(9)   

A statutory instrument containing an order under subsection (8) that

restricts the circumstances in which an election may be made under

section 25A may not be made unless a draft of the instrument

containing the order has been laid before, and approved by a

resolution of, the House of Commons.

45

 
 

Finance Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

167

 

31C     

Excluded persons

(1)   

A person is an excluded person in relation to a tax year if the person

meets any of conditions A to H.

(2)   

Condition A is that—

(a)   

the person is a firm, and

5

(b)   

one or more of the persons who have been partners in the

firm at any time during the basis period for the tax year was

not an individual at that time.

(3)   

Condition B is that the person was a limited liability partnership at

any time during the basis period for the tax year.

10

(4)   

Condition C is that the person is an individual who has been a

Lloyd’s underwriter at any time during the basis period for the tax

year.

(5)   

Condition D is that the person has made an election under Chapter 8

(trade profits: herd basis rules) that has effect in relation to the tax

15

year.

(6)   

Condition E is that the person has made a claim under section 221

(claim for averaging of fluctuating profits) in relation to the tax year.

(7)   

Condition F is that, at any time within the period of 7 years ending

immediately before the basis period for the tax year, the person

20

obtained an allowance under Part 3A of CAA 2001 (business

premises renovation allowances).

(8)   

Condition G is that the person has carried on a mineral extraction

trade at any time during the basis period for the tax year.

   

In this subsection “mineral extraction trade” has the same meaning

25

as in Part 5 of CAA 2001 (see section 394(2) of that Act).

(9)   

Condition H is that—

(a)   

at any time before the beginning of the basis period for the tax

year the person obtained an allowance under Part 6 of CAA

2001 (research and development allowances) in respect of

30

qualifying expenditure incurred by the person, and

(b)   

the person owns an asset representing the expenditure.

   

In this subsection “qualifying expenditure” has the same meaning as

in Part 6 of CAA 2001.

(10)   

The Treasury may by order amend this section.

35

(11)   

A statutory instrument containing an order under subsection (10)

that restricts the circumstances in which an election may be made

under section 25A may not be made unless a draft of the instrument

containing the order has been laid before, and approved by a

resolution of, the House of Commons.

40

Elections under section 25A

31D     

Effect of election under section 25A

(1)   

An election made by a person under section 25A has effect—

(a)   

for the tax year for which it is made, and

 
 

Finance Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

168

 

(b)   

for every subsequent tax year.

   

This is subject to subsections (2) and (3).

(2)   

An election made by a person under section 25A ceases to have effect

if any of conditions A to C in section 31A is not met for a subsequent

tax year.

5

(3)   

An election made by a person under section 25A ceases to have effect

if—

(a)   

there is a change of circumstances relating to any trade,

profession or vocation carried on by the person which makes

it more appropriate for its profits for a subsequent tax year to

10

be calculated in accordance with generally accepted

accounting practice, and

(b)   

the person elects to calculate those profits in that way.

(4)   

Neither subsection (2) nor subsection (3) prevents the person making

an election under section 25A for any subsequent tax year.

15

(5)   

An election that—

(a)   

is made by a person under section 25A, and

(b)   

has effect for a tax year,

   

has effect in relation to every trade, profession or vocation carried on

by the person during the tax year.

20

(6)   

For provision prohibiting a person who has made an election under

section 25A from claiming any capital allowances (other than in

respect of expenditure incurred on the provision of a car), see section

1(4) of CAA 2001.

Calculation of profits on cash basis

25

31E     

Calculation of profits on cash basis

(1)   

This section applies to professions and vocations as it applies to

trades.

(2)   

To determine the profits of a trade for a tax year on the cash basis—

   

Step 1

30

   

Calculate the total amount of receipts of the trade received

during the basis period for the tax year.

   

Step 2

   

Deduct from that amount the total amount of expenses of the

trade paid during the basis period for the tax year.

35

(3)   

Subsection (2) is subject to any adjustment required or authorised by

law in calculating profits for income tax purposes.

Overview of rest of Part 2

31F     

Overview of rest of Part 2 as it applies to cash basis

(1)   

For provision about the application of Chapters 4 to 6 (rules about

40

deductions and receipts) in relation to the cash basis, see sections

32A, 56A and 95A.

 
 

Finance Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

169

 

(2)   

For provision about the application of Chapter 11 (trade profits:

other specific trades) in relation to the cash basis, see section 148K.

(3)   

The following Chapters apply only where profits are calculated on

the cash basis—

Chapter 6A (trade profits: amounts not reflecting commercial

5

transactions),

Chapter 17A (cash basis: adjustments for capital allowances).

(4)   

The following Chapters do not apply in relation to the cash basis—

Chapter 8 (trade profits: herd basis rules),

Chapter 9 (trade profits: sound recordings),

10

Chapter 10 (trade profits: certain telecommunication rights),

Chapter 10A (leases of plant or machinery: special rules for long

funding leases),

Chapter 11A (trade profits: changes in trading stock),

Chapter 13 (deductions from profits: unremittable amounts),

15

Chapter 14 (disposal and acquisition of know-how),

Chapter 16 (averaging profits of farmers and creative artists),

Chapter 16ZA (compensation for compulsory slaughter of

animal),

Chapter 16A (oil activities).”

20

Rules restricting deductions

6          

Chapter 4 (trade profits: rules restricting deductions) is amended as follows.

7          

After section 32 insert—

“Cash basis accounting

32A     

Application of Chapter to the cash basis

25

(1)   

The following sections do not apply in calculating the profits of a

trade on the cash basis—

section 33 (capital expenditure),

section 35 (bad and doubtful debts),

sections 36 and 37 (unpaid remuneration),

30

section 43 (employee benefit contributions: profits calculated

before end of 9 month period),

sections 48 to 50B (car hire).

(2)   

For rules restricting deductions that apply only where profits are

calculated on the cash basis, see the following—

35

section 33A (cash basis: capital expenditure),

section 51A (cash basis: interest payments on loans).”

8          

After section 33 insert—

“33A    

Cash basis: capital expenditure

(1)   

In calculating the profits of a trade on the cash basis, no deduction is

40

allowed for items of a capital nature, other than expenditure that—

 
 

Finance Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

170

 

(a)   

if it were not allowable as a deduction in calculating the

profits of the trade, would be qualifying expenditure within

the meaning of Part 2 of CAA 2001 (plant and machinery

allowances), and

(b)   

is not expenditure incurred on the provision of a car.

5

(2)   

In this section “car” has the same meaning as in Part 2 of CAA 2001

(see section 268A of that Act).”

9          

In section 38 (restriction of deductions in respect of employee benefit

contributions), after subsection (2) insert—

“(2A)   

In calculating for income tax purposes the profits of a trade on the

10

cash basis, this section has effect as if—

(a)   

in subsection (1), the words “or to be made” were omitted,

and

(b)   

in subsection (2), the words “or within 9 months from the end

of it” were omitted (in both places).”

15

10         

Before section 52 (and after the heading “Interest payments”) insert—

“51A    

Cash basis: interest payments on loans

(1)   

In calculating the profits of a trade on the cash basis, no deduction is

allowed for the interest paid on a loan.

(2)   

This is subject to section 57B.”

20

11    (1)  

Section 55A (expenditure on integral features) is amended as follows.

      (2)  

The existing provision becomes subsection (1).

      (3)  

After that subsection insert—

“(2)   

But section 33A(3) of CAA 2001 does not apply in calculating the

profits of a trade on the cash basis.”

25

Rules allowing deductions

12         

Chapter 5 (trade profits: rules allowing deductions) is amended as follows.

13         

After section 56 insert—

“Cash basis accounting

56A     

Application of Chapter to the cash basis

30

(1)   

The following sections do not apply in calculating the profits of a

trade on the cash basis—

sections 60 to 67 (tenants under taxed leases),

section 68 (replacement and alteration of trade tools).

(2)   

For rules allowing deductions that apply only where profits are

35

calculated on the cash basis, see the following—

section 57B (cash basis: interest payments on loans).

(3)   

In calculating the profits of a trade on the cash basis, any reference in

this Chapter to the incurring of expenses is to be read as a reference

to the paying of expenses.”

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Finance Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

171

 

14         

After section 57A insert—

“Cash basis: interest payments

57B     

Cash basis: interest payments on loans

(1)   

This section applies if a person carrying on a trade in a period pays

any interest on a loan during the period and—

5

(a)   

a deduction for the interest would not otherwise be allowable

in calculating the profits of the trade because of section 51A,

or

(b)   

in the absence of section 51A, a deduction for the interest

would not otherwise be allowable in calculating the profits of

10

the trade because (and only because) it was not an expense

incurred wholly and exclusively for the purposes of the

trade.

(2)   

In calculating the profits of the trade on the cash basis, a deduction is

allowed for the interest.

15

(3)   

But the maximum amount that may be deducted by virtue of this

section or section 58 (incidental costs of obtaining finance) in

calculating the profits of a trade for any period is £500.

(4)   

The Treasury may by order amend the figure for the time being

specified in subsection (3).

20

(5)   

A statutory instrument containing an order under this section that

amends that figure so as to substitute a lower figure may not be made

unless a draft of the instrument has been laid before, and approved

by a resolution of, the House of Commons.”

15         

In section 58 (incidental costs of obtaining finance), in subsection (5), after

25

“with” insert “—

(a)   

section 57B(3) (which imposes a limit on the total amount that

may be deducted by virtue of this section or section 57B), and

(b)   

”.

16         

In section 72 (payroll deduction schemes: contributions to agents’ expenses),

30

after subsection (2) insert—

“(2A)   

In calculating the profits of the employer’s trade on the cash basis,

subsection (2) has effect as if paragraph (b) were omitted.”

17         

In section 94A (costs of setting up SAYE option scheme or CSOP scheme),

after subsection (4) insert—

35

“(5)   

But subsection (4) does not apply in calculating the profits of a trade

on the cash basis.”

Receipts

18         

Chapter 6 (trade profits: receipts) is amended as follows.

 
 

Finance Bill
Schedule 4 — Cash basis for small businesses
Part 1 — Main provisions

172

 

19         

After section 95 insert—

“Cash basis accounting

95A     

Application of Chapter to the cash basis

   

For rules about receipts that apply only for the purpose of calculating

profits on the cash basis, see the following—

5

section 96A (cash basis: capital receipts),

section 97A (cash basis: value of trading stock on cessation of

trade),

section 97B (cash basis: value of work in progress on cessation

of profession or vocation).”

10

20         

After section 96 insert—

“96A    

Cash basis: capital receipts

(1)   

This section applies if—

(a)   

the whole or part of any expenditure incurred in acquiring,

creating or improving an asset has been brought into account

15

in calculating the profits of a trade of a person on the cash

basis, or

(b)   

the whole or part of any such expenditure would have been

so brought into account if an election under section 25A had

had effect in relation to the trade at the time the expenditure

20

was paid.

(2)   

The following amounts are to be brought into account as a receipt in

calculating the profits of the trade on the cash basis—

(a)   

any proceeds arising from the disposal of the asset or any

part of it;

25

(b)   

any proceeds arising from the grant of any right in respect of,

or any interest in, the asset;

(c)   

any amount of damages, proceeds of insurance or other

compensation received in respect of the asset.

(3)   

In a case where only part of the expenditure incurred in acquiring,

30

creating or improving an asset has been, or would have been,

brought into account as mentioned in subsection (1), the amount

brought into account under subsection (2) is proportionately

reduced.

(4)   

If—

35

(a)   

at any time the person ceases to use the asset or any part of it

for the purposes of the trade, but

(b)   

the person does not dispose of the asset (or that part) at that

time,

   

the person is to be regarded for the purposes of this section as

40

disposing of the asset (or that part) at that time for an amount equal

to the market value amount.

(5)   

If at any time there is a material increase in the person’s non-business

use of the asset or any part of it, the person is to be regarded for the

purposes of this section as disposing of the asset (or that part) at that

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