Buy to Let Property

Rental Income on Cash Basis

Rental Income on Cash Basis

Landlords of unincorporated properties can make use of the simplified accounting process to calculate taxable profits. This will not only take the tax returns process into the digital age, it will also cut down on the need for adjustment, which was necessary in the traditional accounting process. Cash basis which was once limited to only a few types of businesses have now been extended to unincorporated properties. Here is a look at how cash basis will work for landlords of unincorporated properties.

Cash basis versus traditional accounting 

In other words, cash basis refers to the accounting practice of recording only those transactions their cash has actually come into the accounts or actually sprint. This is different from traditional accounting which involved an accrual process wherein invoice amounts used to be mentioned, even if the amount had not actually been realised. This is a huge relief as it reduces the adjustments that is required because of the mismatch between actual payments made or received and transactions accounted.

The default basis for landlords

This will be the default basis for landlords of unincorporated properties earning revenues below £ 1,50,000. Landlords will have to opt out of the cash basis if they are not interested to use this as the accounting method. Landlords earning in excess of this slab will continue to use the accrual basis. Similarly landlords holding multiple properties can use the cash basis for the purpose of accounting for every individual property subject to the limit of £ 1,50,000.

3 simple differences between cash basis and accrual basis

There are three primary differences between cash basis and accrual basis.

ACCRUAL BASISCASH BASIS
 Income will be taxed regardless of actual receipt income will be taxed on actual receipt
Expenses will be considered as recorded, regardless of actual paved only actual expenses will be considered
Capital allowances are permitted under existing rulesFull deduction of capital allowances when actually incurred

The need for exercising caution when moving into or out of the new regime

Landlords with rental incomes for individual properties that are close to the limit of £ 1,50,000 need to take care while filing returns. Incomes that hover around the limit, may fall into or outside the limit and it is therefore important for landlords to file returns accordingly. Another important consideration is the fact that double accounting needs to be avoided. In other words, care needs to be exercised to ensure that there is no double counting of income or expenses with previous tax returns. This situation will typically arise when a landlord moves into or outside the cash basis system.

Understand different eligibility criteria

Eligibility criteria are basically simple, and a landlord cancel determine if he or she falls within the cash basis if the following conditions are fulfilled. The following eligibility criteria notwithstanding, landlords have the options of opting out of the cash basis.

Criteria #1

The landlord is in the business of unincorporated property and is not regarded as a business carried out by a company, a limited liability partnership, a corporate firm, the trustees of a trust etc.

Criteria #2

The receipts for each individual property are below £ 1,50,000 annually

Criteria #3

If the property is jointly owned with a spouse or any other civil partner, and both use the cash basis for accounting. This confirms to the general exception to the rule about individual partners being able to decide on their own ways of accounting, by bringing uniformity in accounting for the same property.

Restrictions on finance cost and differences in rental profits

The cash basis places certain restrictions on finance costs,  and this can have the effect of impacting the bottom line when calculating the tax component. Similarly rental profit calculations will also differ across both the standards, for a similar scenario. Effectively this means that in certain situations, a landlord would have made more profits if he had remained in the accrual basis,  whereas, in other situations a landlord will earn similar profits across both the standards.

Professional advice on the most suitable option

Landlords need to avail the advice of professional accountants and decide on choosing the most suitable option. This is necessitated because of the allowances committed in each system and the benefits that come from each system. This will differ on a case-by-case basis and can be worked out better by specialist property accountants who have a better grasp and understanding of the system and the various related clauses that me either offer a benefit or take away a benefit.

About the Author:

Sumit Agarwal
, A specialist accountant and tax adviser for freelancers, contractors and small businesses since 2005, He is an expert in business growth and development strategies. A renowned tax expert for owner managed businesses and contractors, He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.