Introduction
Under the cash basis, income and expenses are recorded based on the date the money is received or paid. Under the accrual’s basis, income and expenses are recorded based on the invoice or bill date.
Since the 2017-18 tax year, cash basis has been the default basis for most property businesses that are run by individuals or partnerships with receipts for the tax year of £150,000 or less.
Accruals basis must be used if any of the following conditions apply –
- The rental income exceeds £150,000 in the tax year.
- If the rental property is jointly owned and one of the owners processes their tax return using the accruals basis, the other owner must be process in the same manner.
Cash Basis Calculation
To calculate the properties profit in the tax year, you need to do the check the following –
Example 1 – Steve begins renting a property on 1 September 2022 and the tenant pays rent of £6,000 in advance every 6 months, due 1 September and 1 March. If Steve uses the cash basis, even though £6,000 payment on 1 March 2023, relates to months in the 2023/24 tax year, Steve will declare the £6,000 received on 1 March 2023 in his 2022-23 tax return.
(If Steve used the accrual basis, then he would declare on £1,000 of the March payment in his 2022-23 tax return and the remaining £5,000 in 2023-24 tax return.)
If the tenant delayed paying the £6,000 owed on 1 March 2023 and it was only received on 15 April 2023, Steve would declare the income this income in 2023/24 return, even though it partially relates to 2022-23 tax year.
(If Steve used the accrual basis, then he would declare £1,000 of the April payment to his 2022-23 tax return, as £1,000 relates to March 23, which is included in 2022-23 tax period.)
Example 2 – Sam has a rental property and pays a cleaning company to clean the property once a week. The company invoices on a quarterly basis and they send an invoice dated 30 March 2023 for £750 and Sam pays the invoice on 15 April 2023. If Sam uses the cash basis, the £750 expense will be claimed in his 2023-24 tax return, however, if Sam uses the accrual basis, as invoice dated in 2022-23 tax year, this expense would be declared in 2022-23 tax year.
Capital allowances are not available under the cash basis (except for on cars). Instead, capital expenditure may be deducted in arriving at the profits of the property business, subject the specific exclusions (see following link – https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1095).
Security Deposit
If a tenant pays a security deposit to be held by the owner during the rental period, as this money is still considered the tenants, you do NOT have to declare this income at the time it’s received. When the tenant leaves the property and an amount of the deposit is kept by the owner to cover any damage done to the property during the tenant’s usage of the property, the owner needs to declare this income in their tax return, as it’s now considered income.
