Making Tax Digital: Cash basis accounting for landlords

As part of the introduction of Making Tax Digital, HM Revenue & Customs (HMRC) has confirmed that it will extend the simplified cash basis of accounting for businesses with a turnover below £150,000.

This expansion of cash basis accounting is likely to be welcomed, with an ounce of trepidation, by landlords, who will now be able to declare income if they have actually received it, rather than using the accruals accounting basis.

Under the current accruals accounting system, landlords and property businesses have to take into account the income tenants should have paid as income for that year, despite not having received it yet.

This means that from the 2017-18 tax year, which starts on 6 April 2017, thousands of additional landlords will automatically pay tax based on the difference between money they have taken in and what they have paid out, meaning that they will only be required to pay tax on the rent they have already received.

Landlords will be able to opt out of the cash basis and use Generally Accepted Accounting Practice (GAAP) accounting, by making an election on their tax return. However, this election will only take the landlord out of the cash basis for a single tax year.

In many cases, landlords may already be using a form of the simplified cash basis of accounting as already afforded to many unincorporated trading businesses, often deviating from GAAP.

The change may be confusing for some taxpayers, as they may need to opt in to use the cash basis for trading businesses, and opt out of the cash basis for a property business.

As an example where a landlord has a separate property businesses, such as one letting UK properties, and another letting properties in another country, they can opt out of the cash basis for one property business and not for the other one.

Where a property business is jointly owned by partners who are not married or civil partners, each owner will be able to decide whether to opt in or out of the cash basis.

Inconveniently for some, this means that the accounts for the business will need to be drawn up twice to take into account the separate rules.

Where the property business is owned by a married couple or civil partners, both individuals must use one set of rules.

Partnerships can use the cash basis for a property business, but only where all the partners are individuals, while LLPs, companies, trustees and personal representatives are not permitted to use the cash basis for property businesses.

Link: Making Tax Digital