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Cash basis or accruals basis?

21 Aug 2023 | BY Claire Critchley

There are two different ways in which accounts can be prepared – the cash basis and the accruals basis. The cash basis is the default basis of preparation for unincorporated landlords who are eligible to use it. However, they can elect to use the accruals basis if they prefer. Landlords who are not eligible to use the cash basis must prepare their accounts using the accruals basis.

Nature of the cash basis

The cash basis is a very simple basis of accounts preparation, taking account only of money in and money out in the accounting period. Rental income is taken into account in the period in which it is received by the landlord, regardless of the period to which the rent relates. Likewise, expenses are deductible in the period in which they are paid.

Nature of the accruals basis

The accruals basis is the traditional basis of accounts preparation. It matches income and expenditure to the period to which they relate. Consequently, rental income is recognised in the period to which the rent relates, regardless of when or whether it has been paid. Likewise, expenses are deductible in the period to which they relate. To achieve the matching, it is necessary to take account of debtors and creditors and prepayments and accruals, which is not needed under the cash basis.

Cash basis eligibility

The cash basis applies by default unless any of the following apply.

  • The business is run by a company, a limited liability partnership, trustees or a partnership with at least one corporate member
  • 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 none of the above apply, the landlord must prepare accounts using the cash basis, unless they elect to use the accruals basis instead. If any of the above apply, the landlord cannot use the cash basis and must use the accruals basis.

Advantages of the cash basis

The cash basis has a number of advantages over the accruals basis, the main one being simplicity.

There are also cash flow advantages. As income is not taken into account for tax purposes until it has been received, the landlord will have the cash before having to pay the associated tax. This also means that relief for bad debts is automatic.

The rules for dealing with capital expenditure are also more straightforward under the cash basis, as capital expenditure can be deducted in calculating profits unless it is of a type for which such a deduction is not permitted.

Partner note: ITTOIA 2005, ss. 271A – 271D.

 

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