The government is consulting on introducing the choice to use the simplified cash basis currently available to some unincorporated traders. As for traders, adoption of the cash basis would be optional. As the cash basis rules would be designed with the simplest businesses in mind, they may not be the right choice for all eligible unincorporated property businesses. Landlords will therefore be free to choose the basis which works best for their business.
The cash basis method of calculating tax works on a cash in, cash out basis. Income is only recognised when it is received and expenses when they are paid.
At present, property businesses must use the same accountancy rules as most other businesses, including trading businesses, when they work out their profits. Calculation of profits must be done in accordance with Generally Accepted Accounting Practice (GAAP). GAAP uses the accruals basis (sometimes referred to as the earnings basis) which recognises income earned and the expenses incurred in earning that income in a period (whether or not the amounts have actually been received or paid).
Who does this apply to?
The proposals are relevant to individuals and partnerships of individuals with unincorporated property businesses. It is proposed that the cash basis would also be available to eligible non-UK resident landlords.
Does not apply to
The proposals do not apply to company property businesses, trusts, holders of units in unit trusts, real estate investment, trusts, and partnerships with corporate members, limited liability partnerships and other similar, more complex entities would not be able to use the cash basis.
Types of businesses
Unincorporated property businesses can take several different forms; a UK property business or overseas property business could include residential or commercial properties, furnished holiday lettings or receipts to which the rent-a-room scheme applies.
General Principles of the proposal
- The cash basis would not change the underlying principles of what expenditure is allowable in calculating the profits of a property business. As with the accruals accounting basis, expenditure must be incurred wholly and exclusively for the purpose of the property business to be tax deductible and withdrawal of cash from the business will not affect the calculation of profits. Adopting the cash basis would simply change the time when deductible expenditure is recognised.
- As with the current rules, those amounts which would normally be chargeable under the Capital Gains regime would continue to fall within that regime and not be property income for income tax purposes, for example, premiums on long leases or the sale of the property.
- Some receipts which are not treated as property income receipts under the accruals accounting basis would be income receipts under the cash basis, for example, the proceeds from the sale of a van used for the property business where the cost has been deducted when initially purchased. Also, some events, such as a change of use of such an asset from business to personal use, would require the current value of the asset to be treated as an income receipt.
The cash basis should also help property businesses to calculate their taxable property business profit for any given period therefore making the move to quarterly digital updates as smooth as possible.
No “relevant maximum” for eligible unincorporated property businesses
One of the eligibility criteria for the cash basis for trading income is that the total cash basis receipts for all trades carried on by a person in a tax year does not exceed the “relevant maximum”. The relevant maximum amount for a tax year is the VAT registration threshold at the end of that tax year (£83,000 for 2016/17) or twice the VAT registration threshold for Universal Credit claimants. The government is not intending to impose a relevant maximum limit on entry into the cash basis for eligible unincorporated property business. The eligibility criteria will instead only be based on whether the unincorporated property business is carried on by an individual or partnerships of individuals.
Restriction of finance costs
The cash basis for trading income has a restriction on interest expense, with a maximum of £500 allowable as an expense for interest and other costs paid on cash borrowings. Under the cash basis for unincorporated property businesses, there would also be a restriction on interest expenses and other costs paid on cash borrowings. For those with residential properties, relief for interest will continue to be restricted to the basic rate of income tax, in accordance with the restriction of finance cost relief for individual landlords introduced in the Summer Budget 2015.
Regardless of which method is used whether the accruals or cash basis, the same amount of relief for interest (and other borrowing costs) on mortgages should be available. Any difference would purely be the timing of the relief.
Summary of Consultation Questions
- Question 1 Do you feel there should be a relevant maximum limit imposed for eligibility for the cash basis for unincorporated property businesses? If so, what should this limit be and why?
- Question 2 Do you feel there is any reason why the cash basis should not be optional for all eligible unincorporated property businesses?
- Question 3 Would you want to opt in for each of their property businesses separately (for example, UK property business and overseas property business) or would they prefer to choose whether to opt in for all their property business
income or none of it?
- Question 4 Does the above advice give you enough information to decide whether or not to use the cash basis with/without (please indicate) professional advice? If not, what else would you need to know about the new rules?
- Question 5 Does a regime that allows for individuals letting jointly, not in partnership, to separately opt to report using the cash basis present particular difficulties or issues
- Question 6 Should eligibility for the trading cash basis affect eligibility for the cash basis for unincorporated property businesses? If so, do you have any suggestions on what this interdependence should be?
- Question 7 Would only recognising deposits that landlords are entitled to keep at the end of a tenancy create unnecessary complexity?
- Question 8 Do you feel there is anything which has not been considered which could make the cash basis as simple as possible for landlords?
- Question 9 Are you aware of any risks that the cash basis for
unincorporated property business could present which could lead to the avoidance or reduction of liability to income tax? If so, please provide details.
- Question 10 Do you have any comments, not already provided, on any aspect of the proposal?
- Question 11 If the government introduces a simpler tax system for unincorporated property businesses, please provide details of how this will affect your business. This should include details of both the expected one-off and ongoing benefits and costs of:
a) Familiarisation with the new basis and updating your software or systems.b) Not having to keep accruals accounts and prepare calculations in accordance with UK GAAP.
- Question 12 Please tell us if you think there are any other benefits or costs not covered in the summary of impacts.
What do you think?
Other areas covered by the consultation
This is only one part of the consultation. See summaries of the other areas here.