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How Your Property Income Must Be Calculated

March 31, 2016

Advice on accruals for property investors from Optimise Accountants

By Simon Misiewicz

Do you wish to prevent a HMRC investigation?

Do you know what accruals means?

Most property investors will send their accountant details of money they have received and spent running their property portfolio. Profits and tax will then be calculated and another year done.

Did you use accruals basis?

Sadly, HMRC states that property income and costs must be calculated using the accruals methodology.  This means your income should be stated as it is due rather than actually received.

For self-employment income you may used a cash basis accounting system, meaning you declare only money that has actually been received in any given tax year, but this method is not allowed for property income. If you do use the cash basis method for other income you can continue to do so, but you must use the accruals method for any property income.

Let’s look at an example.

Sarah has a property and charges £500 rent per month starting from April 2015. That means she should show on her property pages an income of £500 X 12. In reality she is paid in arrears so the March 2016 rental income of £500 will not be received until late April 2016.

She would still need to show the rental income on her tax return as £6,000 and not £5,500 as she was planning.

Any unpaid invoices that you are owed by tenants will be shown on your balance sheet as an asset until paid.

Bad debts

It gets worse. Imagine that the tenant left the property in January, meaning that only 10 months of invoices had been paid. That means that Sarah only received £5,000 of income where she was meant to have received £6,000. HMRC will still want the tax due on the profits made based on the £6,000, not £5,000.

In the normal course of business you would chase the debt until you have received it or given up. The £1,000 debt will still be shown on the balance sheet as an asset.

Only at the time of you giving up can you claim the £1,000 rental loss (in this example) as a bad debt (cost) in your property pages.

If the debt is eventually repaid then you would need to show the £1,000 on the following tax year’s property page as an income.

Accrued costs

The accruals basis is applied to costs as well. Let’s say that you have a builder that has completed “maintenance work” and invoiced you for £5,000 as at 30th March 2016. That means that the £5,000 cost could be allocated against your property income in the 2015-16 tax year even though you have not paid for it yet. This means that you will get the tax relief at the point of an invoice being sent to you.

Any unpaid invoices that you owe suppliers will be shown on your balance sheet as a liability.

Xero bookkeeping

As you can imagine, this can be very difficult to administer and that is why we suggest you use an online bookkeeping service such as Xero, which allows you to enter six monthly rental invoices and costs and will provide the accruals methodology to meet HMRC’s requirements.

Next steps

Check out Xero to see how it might help.

If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:

If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk