Accruals basis

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Accruals basis
  • Outline
  • Income tax / corporation tax differences

Outline

From 2017/18, the default method of calculation of property business profits is a simplified cash basis for small unincorporated property businesses with receipts of up to £150,000, subject to an election to opt out. See the Simplified cash basis for property businesses guidance note.

Where the cash basis does not apply, the calculation of the profits of the rental income business should be in accordance with generally accepted accounting practice (GAAP), subject only to adjustments required by tax legislation. Company accounts should already adhere to GAAP but this is given statutory effect by ITTOIA 2005, s 25 and CTA 2009, s 46 for income tax and corporation tax purposes, respectively.

ITTOIA 2005, s 272; CTA 2009, s 210

Specifically, this means that the income and expenditure should be calculated on an accruals basis as opposed to the basis of cash receipts. Note, in this context, that when computing rental income for an individual, partnership or trust, this will be done in accordance with the relevant tax year. For a property business, an alternative accounting period cannot be used as it can be for a trade.

Calculating the rental income in accordance with GAAP means that, in particular, any rent-free periods are dealt with by calculating the total rent due for the life of the lease (or until the first rent review) and then dividing this equally between the term. A landlord can therefore be taxed on rental income he has not yet received if he allows a rent-free period.

Although rental income should be calculated on an accruals basis according to statute, HMRC had previously (prior to 2017/18) accepted the use of a cash basis for small amounts of rental income (for gross receipts not exceeding £15,000), provided the cash basis wa

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