As for unincorporated trading businesses, the cash basis is the default basis of accounts preparation for landlords running an unincorporated property business. However, unlike traders, landlords can only use the cash basis if their rental receipts calculated under the cash basis are £150,000 or less for the tax year. Landlords who are not eligible for the cash basis must prepare their accounts using the accruals basis (also known as traditional accounting). Landlords who are eligible to use the cash basis but who would prefer to use the accruals basis must elect to do so.
Nature
The cash basis is a simple accounts preparation under which income is only recognised when received and expenses are only recognised when paid. There is no need to match income and expenses to the period to which they relate, as under the accruals basis. Consequently, there is no need to determine debtors and creditors or to calculate accruals and prepayments. Further, as income is only taken into account when received, the cash basis provides automatic relief for bad debts.
Under the cash basis, it is also possible to deduct capital expenditure in calculating taxable rental profits unless the item is of a type for which a deduction is specifically prohibited, as is the case for land and buildings and cars. Where a deduction is not allowed, relief may be available under the capital allowances system.
Eligibility
Not all unincorporated landlords can use; It is only available where none of the following apply:
- The business is run by a company, limited liability partnership, trustees or a partnership with at least one corporate partner.
- Receipts brought into account under the cash basis for the tax year exceed £150,000.
- The property business is carried on jointly by spouses or civil partners and the other spouse/civil partner is taxed under the accruals basis and a Form 17 election has not been made.
- Business premises renovation allowance has been claimed and there is a balancing charge in the tax year.
If any of the above apply, the landlord must use the accruals basis.
Moving between the cash and the accruals basis
If the landlord changes the basis used to prepare their accounts, they will need to make adjustments to ensure that items are not taken into account twice or not at all.
