Accruals basis is the traditional method of accounting. The aim is when we are preparing accounts for the tax year, we include all the income that arose in the year and all expenditure that arose in the year, irrespective of when monies changed hands.
Up until 5 April 2013, all businesses had to prepare their accounts and pay the tax due on the accruals basis.
Since 6 April 2013, traders under the VAT threshold, were allowed to use the cash basis to prepare their accounts.
From 6 April 2017, the cash basis became the default basis for individual landlords with less than £150,000 of rental receipts in a year.
However landlords may opt to continue to use the accruals basis.
If landlords run other businesses, which use the accruals basis, they may prefer to use the accruals basis for their rental property business to keep everything consistent.
Alternatively they can opt for the cash basis for their rental property business whilst using the accruals basis for their other trading businesses.
Overseas Rental Property Businesses
Overseas rental property business are treated as separate to UK rental property businesses.
A landlord can choose the most appropriate accounting method for each of the businesses. There is no requirement to use the same accounting method.
Joint owners who are spouses or civil partners, must use the same accounting method to calculate their rental property profits. They can use a different basis if they declare that they are beneficially entitled to the income in unequal shares.
Other joint owners can each make their own choice. One may use the cash basis where the other uses the accruals basis.
Unlike sole traders and partnerships, the accounting period for individual landlords is 6 April to 5 April. If accounts are drawn up to a different date, then must use 2 accounting periods and apportion on a daily basis to 6 April – 5 April.
How to make the election
Simply tick the box on the tax return to indicate you are using traditional accounting. The election should be made within 1 year of the normal filing date for the tax year, so if the tax return is filed on time, then this condition is met.
Transition from Cash Basis
For those who wish to move from the cash basis to the accruals basis, perhaps because they are no longer eligible, the following steps need to be taken:
- Ensure that where income has been taxed on receipt in the previous tax year that it is not taxed again under the accruals basis.
- Similarly when expenses have been included in taxable profits in the previous tax year, they should not be accounted for again in the new tax year.
If you would any advice on the most appropriate accounting method for your business, please drop us an email at firstname.lastname@example.org