The cash basis threshold has been set at £150,000 to allow more buy-to-let landlords to benefit from being taxed on the cash basis set out in draft legislation released as part of HMRC’s Making Tax Digital plans
Almost all respondents to HMRC’s Making Tax Digital consultation on Simplified cash basis for unincorporated property business supported landlords being able to use the cash basis so that they only have to declare income if they have actually received it, rather than using the accruals accounting basis.
Government has accepted this approach and in response will increase the cash basis threshold, so that thousands more landlords will be able to pay tax based simply on the difference between money they have taken in and what they have paid out.
Some respondents felt that there should be no entry threshold whereas others felt that the cash basis was not suitable for large unincorporated property businesses therefore a maximum income threshold has been set.
Under the cash basis, landlords will not need to declare income until it is actually received, meaning that any tax on the profits of the property business would not be paid until the rent is received. Landlords opting to use accruals accounting will have to include the income tenants should have paid as income for that year, despite not yet receiving it.
The amendment to the threshold will be effective for the 2017-18 and the subsequent tax years.
HMRC suggested, in the consultation documents released in August 2016, that landlords with annual business income below £10,000 will not be required to keep their business records digitally or provide quarterly updates to HMRC, but they will still be able to use the optional cash basis.
After outcry from MPs and businesses saying that the proposed exemption threshold was too low, government has now agreed to review the proposed £10,000 threshold which will be confirmed before the new rules on Making Tax Digital are laid out in the Finance Bill in July.
It is expected that up to 2.5m property business will use the simplified cash basis.
In a similar Making Tax Digita consultation on Simplifying tax for unincorporated businesses the majority of respondents supported simplifying the tax system which will be done by increasing the entry threshold for the cash basis to £150,000 and simplifying the rules on capital and revenue expenditure within the cash basis to make it easier for businesses to work out whether expenditure is deductible.
Draft legislation and an HMRC impact assessment for MTD have been issued today.
Consultation outcome: Business Income Tax: Simplified cash basis for unincorporated property businesses is available here.
Consultation outcome: Business Income Tax: Simplifying tax for unincorporated businesses is available here.