What we know about MTD, New cash basis, VAT on failed venture

The changes required to comply with reporting under making tax digital (MTD) will have a significant impact on your clients over the next five years. IN last week’s tax tips email we summarised what we know about the MTD plans, and what is still to be clarified. The Government has also announced new rules and thresholds for the cash basis, to take effect from 6 April 2017. Finally, we had a useful lesson about reclaiming VAT on business costs. It is just the cash basis point we have summarised below:

New cash basis

Reporting under MTD is going to be so much simpler if the business uses the cash basis rather than the accruals basis to draw up accounts. Hence the Government wants to widen the scope of the cash basis, and extend a version of the cash basis to landlords.

Currently any unincorporated trading business (not LLPs or property businesses) with turnover under the VAT registration threshold (£83,000) can start to use the cash basis. The business does not have to switch to the accruals basis until the turnover reaches twice the VAT threshold. This entry threshold will be increased to £150,000, and the exit threshold will increase to £300,000 from 6 April 2017.

When advising clients to use the cash basis remember that deductions for interest payments are prohibited, for amounts exceeding £500 per year. Also, there is no sideways relief or carry back of losses when using the cash basis.

The extension of the cash basis to landlords will apply by default to all unincorporated landlords from 6 April 2017, who have an annual turnover of no more than £150,000. Landlords, particularly of furnished holiday lettings, may want to opt out of the cash basis and use accruals accounting, in order to claim capital allowances. The landlord will be able to opt of the cash basis on a property by property basis.

The version of the cash basis for landlords will permit deductions for interest paid using the same rules as for individual landlords who use the accruals basis. Thus, the interest restrictions for individual landlords due to apply from April 2017 will apply equally for all individual landlords in the cash basis or not.