Cash Accounting for Landlords
Landlords – remember to prepare your accounts on the cash accounting basis.
Unless you have specifically opted out of cash accounting (which you need to do each year on your tax return), remember that the cash basis now applies automatically to all unincorporated property businesses so long as their rental income is less than £150,000 per annum.
What does ‘the cash basis’ mean?
Basically it means that the property accounts are prepared based on the dates when the money comes in or goes out of your bank account, rather than according to date of invoice sent or invoice received.
So sales are accounted for when the money has been received, and any purchases only when the money has actually been spent.
Before 6th April 2017, property accounts were prepared on what is known as the ‘accrual basis’, or in simple terms, by date of invoice.
Both methods do usually give the same results, however there can be disparities should payments from tenants be late. If this is often the case, then the cash basis can be more simple for a landlord to manage.
Mr Maguire owns one rental property and receives £600 rent on the 6th of each month, having invoiced his tenant on the 6th of the previous month.
Over the course of the year (from 6th April 2018 to 5th April 2019) he has raised a total of £7,200 in invoices to his tenant. In that same period he has received his rental income in only 11 of those months, or £6,600 in total.
He also did some work on the property during the winter and received invoices associated with this work for £350 and £250 in February and March respectively. He paid the £350 invoice on 3rd March and the £250 invoice on 12th April.
So let’s have a look at the difference in the accounting methods:
Cash Basis Accrual Basis
Income £6,600 £7,200
Expenses: £350 £600 (£350+£250)
Rental Profit: £6,250 £6,600
So in this scenario you would be paying tax in this financial year on £350 more profit under the accrual accounting method than if you were using the cash basis.
As always, if you have any questions relating to this or other matters, please don’t hesitate to contact us.