Simplified cash basis expenditure

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Simplified cash basis expenditure
  • General calculation of profit
  • Wholly and exclusively
  • Capital expenditure
  • Capital receipts
  • Interest payments on loans

Although the simplified cash basis is a new basis of calculating profit, many of the established principles of case law continue to apply. This is because selected pieces of legislation continue to apply and new legislation mirrors established legislation.

Where the wording of legislation is such that it matches existing legislation, it should be considered that Parliament has intended that current interpretations are acceptable.

General calculation of profit

Under the cash basis, there is a simple two-step calculation:

  • cash receipts actually received, less
  • cash expenses actually paid

ITTOIA 2005, s 31E

In addition to this, the removal of the requirement for generally accepted accounting practice (GAAP) treatment provides a simplification of the accounting treatment. Consequently, it is not possible to receive deductions for accruals or provisions. This removes the requirement for a business to compute certain figures such as:

  • debtors
  • creditors
  • stock
  • capital expenses, and
  • capital allowances

Some of the amendments to the reading of ITTOIA 2005 under the simplified cash basis simply enforce this treatment. For example, under the simplified cash basis, there is no statutory relief for bad debts under ITTOIA 2005, s 35 or employee remuneration accruals under ITTOIA 2005, ss 36–37.

Others, such as the alteration to the treatment of capital expenses and receipts, remove areas of complication. However, some of the well-understood principles derived from case law are retained.

Wholly and exclusively

The simplified cash basis retains the provision of ITTOIA 2005, s 34 which states that expenditure must be incurred ‘wholly and exclusively’ for the purposes of the trade. This means that expenditure with

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