To date, the cash basis rules have prohibited a deduction for expenditure of a capital nature unless such expenditure would qualify for plant and machinery capital allowances under the ordinary tax rules. However, if the Finance Bill 2017 proposals are enacted this general disallowance of capital expenditure rule will be replaced from 2017/18 onwards with a more limited disallowance of capital expenditure incurred in relation to assets which are not used up in the business over a limited period.
So, if enacted, from 2017/18 onwards, relief will be prohibited only in relation to costs incurred in relation to the provision, alteration or disposal of:
- any asset that is not a 'depreciating asset' (to be defined as having a useful life of up to 20 years);
- any asset not acquired or created for use on a continuing basis in the trade;
- a car (but of course business mileage-based relief is available);
- land (as defined);
- a non-qualifying intangible asset, (as per Financial Reporting Standard 105) including education or training; and
- a financial asset.
Costs in relation to the acquisition or disposal of a business, or part of a business, will also be excluded.
On entering the cash basis, which many taxpayers will do for 2017-18, it will be necessary to adjust for:
- amounts which, applying the cash basis, would have been brought into account for a period before the change and were not brought into account; and
- amounts which, applying the cash basis, should be brought into account for a period after the change and were brought into account for a period before the change.
These adjustments are designed to ensure that no amounts are either left out of account or double counted. The adjustment income/expense is brought into account on the last day of the first period of account under the cash basis.
Similar rules apply where a taxpayer leaves the cash basis with the exception that adjustment income is automatically spread over six years unless an election is made to accelerate the charge.
Given the uncertainty of the current situation, clients are encouraged to ensure that all income and expenditure is recorded, particularly where clients are intending to make use of the property allowance. If the proposals are not enacted, or are delayed to a future tax year, the client will need to report their actual income and expenditure and so it is important that adequate records are kept.