The tax year 2017/18 is the first tax year wherein cash basis applies by default to unincorporated property business with annual rental income of less than £150,000.
Cash basis essentially takes account of money in and money out when preparing accounts. This means that sales are taken into account in the accounting period in which payment is received and expenditure is deducted.
Before the 2017/18 tax year, individual landlords were required to declare their income and expenses on an accrual basis which matches income and expenditure to the accounting period that they relate to.
Both basis usually give rise to identical results, but disparities arise when payments from tenants are late.
For Example
Mr Kingsley, who is a landlord, prepares his accounts for 2017/18 tax year. He issues invoices on the 10th of each month for rent of £1,000 and he receives the payment from his tenant every 10th of the following month.
During the year, he has issued invoices of £12,000 of which payment has been received for 11 months. In January and February, he has undertaken some maintenance work that costs £650 and £500. He paid the £650 invoice on 3 March and £500 on 9 April.
Cash Basis
- Income:
- £11,000
- Expenses:
- £650
- Rental Profit:
- £10,350
Accrual Basis
- Income:
- £12,000
- Expenses:
- £650
- £500
- Rental Profit:
- £10,850
If you do not wish for cash basis to apply, you have to opt out annually on your tax returns.