What does section 32A of ITTOIA 2005 do?

Section 32A acts as a signpost for United Kingdom cash basis traders, identifying which standard Chapter 4 deduction rules are disapplied when profits are calculated on the cash basis and directing the reader to the replacement provisions specifically designed for cash basis calculations, such as those for capital expenditure and interest payments.

Which deduction rules are switched off for cash basis traders under section 32A?

The rules disapplied for cash basis traders include capital expenditure (section 33), bad and doubtful debts (section 35), unpaid remuneration (sections 36 and 37), employee benefit contributions calculated before the end of a nine-month period (section 43), and car hire (sections 48 to 50B). These accruals-based provisions are unnecessary when income and expenses are recognised only on receipt or payment.

What replacement rules apply under the cash basis instead of the disapplied provisions?

The cash basis has its own dedicated provisions. Section 33A provides rules for capital expenditure under the cash basis, and section 51A governs interest payments on loans. These replacement rules are tailored to the simpler cash basis framework while ensuring appropriate limits on certain types of expenditure remain in place.

Why is the bad debt deduction unnecessary for a cash basis trader?

Under the cash basis, income is only recognised when cash is actually received. If a customer never pays an invoice, that amount was never included in the trader's taxable income. There is therefore no need for a bad debt deduction under section 35 because there is no corresponding income entry to offset against.

Income Tax (Trading and Other Income) Act 2005 section 32A

Application of Chapter to the cash basis

Section 32A summarises which rules in the general deductions chapter apply, and which do not, when a trader calculates their profits using the cash basis rather than the accruals basis.

Several standard deduction rules are switched off for cash basis traders, including those for capital expenditure, bad and doubtful debts, unpaid remuneration, employee benefit contributions calculated before the end of a nine-month period, and car hire
Replacement rules specifically designed for the cash basis apply instead, such as the cash basis capital expenditure rule and the cash basis interest payments rule
The accruals-based rules are unnecessary under the cash basis because income and expenses are recognised only when money actually changes hands, making provisions for unpaid amounts and timing adjustments redundant
Traders using the cash basis should look to the dedicated cash basis provisions rather than the standard Chapter 4 deduction rules for guidance on what expenditure is allowable

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