With the all the tax changes that have affected landlords in recent years, you’d be forgiven for not noticing an accounting change that came into effect on 6 April 2017.
For those not in the know, most landlords now prepare their accounts using the cash basis.
The cash basis is a simpler way of keeping your books that could potentially streamline your finances and save you time.
What is the cash basis?
The cash basis calculates taxable profits using the money that comes in and out of your business. Income is taxed when you receive it and expenses are deducted when they are incurred.
This means you only pay income tax on money you received during your accounting period.
It is designed for people with relatively simple tax affairs such as sole traders, partners and some small businesses.
Property businesses and the cash basis
Since the rules were extended to property business from 6 April 2017, the cash basis now automatically applies to landlords if:
- they are not a limited company or limited partnership
- their rental income is less than £150,000.
If you meet these conditions but want to prepare your accounts another way, you need to opt out on your tax return.
The opt out only lasts a year so you will need to repeat the process each year to avoid automatically falling under the scheme.
Your 2017/18 tax return is the first one you’ll need to prepare under the cash basis. Here are some things to look out for.
Entering and leaving the cash basis
There may be some accounting adjustments when you switch to the cash basis or leave the scheme. This is something we can deal with when preparing your accounts and it shouldn’t impact your tax position.
The £150,000 threshold
HMRC recognises that businesses using the cash basis may grow during the tax year. To address this, it allows most businesses to stay in the scheme until their turnover reaches £300,000 a year.
However, this rule currently does not apply to landlords. Instead, landlords must leave the scheme when their turnover exceeds £150,000.
This is potentially problematic for people close to £150,000 mark as it can be hard to determine whether you’re eligible.
If you own a property with someone else, your accounting options will depend on your relationship with the other owner.
Married couples or civil partners
Both individuals must either use the cash basis or traditional accounting for property income.
Not married or a civil partners
Individuals who own property together don’t have to use the same accounting method.
However, if one owner chooses the cash basis and the other chooses traditional accounting, the same accounts will need to be prepared in 2 separate ways.
We can make sure your accounts are accurate and sent to HMRC on time. Speak to us to see how we can help.