Sarah Laing looks at proposals to reform the tax system for landlords.
Although proposals to allow landlords to use the cash basis for calculating taxable profits were confirmed in the 2017 Spring Budget on 8 March 2017, and the legislation to do so was included in the subsequent Finance Bill, it did not appear in the much-reduced Finance Act 2017, which received Royal Assent on 27 April 2017. The changes, which were to have taken effect from 6 April 2017, were eventually included in Finance Bill (No 2) published on 8 September 2017, but as the legislation has yet to receive Royal Assent, we appear to be in a period of uncertainty in this particular area of taxation.
Calculating profits
We do know that up to and including 2016-17, profits of a property business must be calculated in accordance with generally accepted accounting practice (GAAP), commonly referred to as the accruals basis. This means that 2016-17 electronic self-assessment returns, with a submission deadline date of 31 January 2018, will need to be completed using the existing or ‘old’ rules.
Although the existing rules will remain for certain landlords (including companies, LLPs, corporate firms, and trustees of trusts), if the Finance Bill (No 2) 2017 provisions are enacted with retrospective effect from 6 April 2017, the position for 2017-18 self-assessment returns and subsequent years will be more complicated.
Cash basis
The general rule will be that the cash basis must be used. However, this is subject to some exceptions and there will be scope for the individual to elect to continue using the accruals basis if they so wish. In addition, whilst the new property allowance will remove some landlords from income tax altogether, for others, it will simply provide a deduction from profits of £1,000.
The cash basis operates by reference to the tax year. This means that profits are calculated for the tax year by adding or subtracting:
- all income received regarding the property business in the tax year; and
- any income that is not taxable and for expenses which are not allowable.
To date, the cash basis rules have prohibited a deduction for expenditure of a capital nature unless such expenditure would qualify for plant and machinery capital allowances under the ordinary tax rules. However, if the Finance Bill (No 2) 2017 provisions as originally published are enacted, this general disallowance of capital expenditure rule will be replaced from 2017-18 onwards with a more limited disallowance of capital expenditure incurred in relation to assets which are not used up in the business over a limited period.
So, if enacted, from 2017-18 onwards, relief will be prohibited only in relation to costs incurred in relation to the provision, alteration or disposal of:
- any asset that is not a ‘depreciating asset’ (to be defined as having a useful life of up to 20 years);
- any asset not acquired or created for use on a continuing basis in the trade;
- a car (but of course business mileage-based relief is available);
- land (as defined);
- a non-qualifying intangible asset, (as per Financial Reporting Standard 105) including education or training; and
- a financial asset.
Costs in relation to the acquisition or disposal of a business, or part of a business, will also be excluded.
On entering the cash basis, which many taxpayers will do for 2017–18, it will be necessary to adjust for:
- amounts which, applying the cash basis, would have been brought into account for a period before the change and were not brought into account; and
- amounts which, applying the cash basis, should be brought into account for a period after the change and were brought into account for a period before the change.
Practical Tip:
Given the uncertainty of the current situation, it is imperative that landlords maintain meticulous records of all income and expenditure, particularly where they intend to make use of the property allowance.
