On 31 January 2017, HMRC published the outcome of the consultation on Income tax - simplified cash basis for unincorporated property businesses. This includes a summary of the consultation responses together with the government’s comments and conclusions, and sets out next steps.
This was one of six 2016 consultations on the Making Tax Digital (MTD) project. The Tax Faculty has posted news items on each of the six consultation outcomes.
Our response to the consultation on the simplified cash basis for unincorporated property businesses was published as ICAEW Rep 173/16. HMRC has also published draft legislation to enact the proposals together with explanatory notes.
The following changes will apply from 6 April 2017, one year earlier than the other MTD changes.
From 6 April 2020, tax relief for interest paid will be given as a tax reducer calculated as 20% of the interest paid. The change is being phased in over four years from 6 April 2017, with 25% of the interest restricted, and additional 25% restrictions applied in subsequent years.
For the remaining few years while a proportion of the interest paid is still a rental expense, it can be calculated in the same way for the cash basis as for the accruals basis. Under the cash basis for trading businesses interest relief is restricted to £500 of interest.
Lease premiums, or work done by the tenant in lieu of a premium will not fall within the cash basis.
Refundable security deposits will not have to be accounted for under the cash basis until they become rightfully the landlords, at which point there should be an expense to match against it for the remedial work that the deposit was retained for.
Timing for receipts and payments
The timing for receipts and expenditure where the property is managed by an agent, will be the date the cash is received or paid by the agent and not the date that the agent accounts for it to the landlord.
Some outstanding issues remain
Problems highlighted in our response to the consultation still remain; for example, depending on whether the cash or accruals basis is used, a landlord may be taken in and out of accountability for the High Income Child Benefit Charge, may lose some or all of the personal allowance, or may find they are paying tax on rental income at 40% rather than 20%.
Fluctuations in the timings of rent receipts could also have an adverse effect on the level of the payments on account, so will make it more difficult for some landlords to predict their tax liabilities with accuracy.
This new regime will apply from 6 April 2017, a year ahead of MTD. Draft legislation has been published for inclusion in Finance Bill 2017. If you have any comments on the draft legislation please send them to firstname.lastname@example.org.