Richard Coombs explains the change to cash based accounting for landlords with rental income below £150,000.
“At this time of year many people will be thinking about preparing their 2017/18 tax returns. If you are a landlord, you may have missed an important change that HMRC introduced recently regarding how income and expenses should be accounted for.
Prior to 2017/18, landlords were required to use an accruals method of accounting for income and expenditure. In other words, income or expenditure was recognised when it was due rather than when it was actually paid or received. However, from April 2017, HMRC have now extended the cash basis which small business have been able to operate for some time now to landlords, and indeed the cash basis will be the default method of calculation if certain conditions apply. The cash basis works as the name suggests – you only bring in income that you have actually received in a tax year and you only deduct expenses that you actually pay in that year. In that way it should simplify the position for many landlords as it will mean that the taxable profits in any tax year will be more closely aligned to the net cash received in that year.
The cash basis will not apply to all landlords though. The cash basis will be the default method of calculation where total receipts from the rental business do not exceed £150,000, although landlords will be able to elect for the accruals method if they wish. Where the gross receipts exceeds £150,000 then the accruals method will be mandatory.
The position with regards to jointly held property complicates matters slightly. Where a property is jointly owned between husband and wife or between civil partners then the same method of calculation must be used for both parties. However, other joint owners can elect different treatments depending on their own circumstances.
Difficulties may arise in this first year where an accruals method of accounting has been used previously as it will be important to ensure that income and expenses are not double counted or missed out altogether.
If you would like our help in clarifying your position, please do get in touch.