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Cash accounting for landlords & what it means for quarterly reporting

With an estimated 1.4 million individuals working as landlords across the UK, any changes to accounting practices impacts a significant part of the population.

Confirmed in the Spring Budget 2017, all landlords in the UK will automatically be in cash accounting. Departing from the usual expectation that individuals would need to opt IN to an accounting system, it is instead now an opt OUT.

Landlords will still be able to use the UK GAAP for tax preparation, but should look into whether cash accounting is the right option for their business.

The switch to cash accounting for landlords combined with quarterly reporting can be easy to manage with Debitoor invoice software

More about cash accounting

You’re likely familiar with the cash accounting method, but if you’ve been using accrual accounting, here’s a quick recap. Cash accounting refers to recording income and expenses at the time the cash is received.

When it comes time for tax filing, landlords can claim the up-front costs associated with capital costs encountered in the business. However, under this method, it is not possible to include capital allowances, with the exception of the provision of cars.

For those who choose to use UK GAAP under cash accounting, the initial costs of items for business usage in the home (if working from home). These items will, however, still be eligible for the replacement relief.

Rules specific to landlords

The cash accounting basis comes with a couple of rules that pertain to landlords. These rules are as follows:

  • The cash accounting method can be used regardless of the total amount of rental income earned.
  • The cash accounting method does not introduce any restrictions on the amount of deductions that landlords can claim on finance costs or on interest (with the caveat that the amount borrowed is not higher than the value of the property).

The interest expense is treated the same, even under UK GAAP.

Cash accounting and quarterly reporting

HMRC’s move to digitise tax is a topic that has received significant attention across the UK, with seemingly endless analysis of the potential ramifications for small businesses.

With HMRC touting the benefits of each freelancer and small business maintaining a tax account online, it has many wondering whether quarterly reporting might actually be better than reporting annually.

The idea behind the move is to make it easier for small businesses to stay on top of their tax filing. For many, this also means finding an online platform that provides them with the tools to manage their accounting.

Accounting and invoicing software that allows a cash accounting option can simplify the process and make quarterly online reporting a lot less burdensome than it may seem. It can also prevent some of the most common accounting mistakes that are encountered by accountants. These include:

  • Waiting until the last moment. A shoebox full of receipts is often involved. One that is filled to the brim with no notable organisation methods in place. Instead, online software allows you to immediately record an expense by snapping a photo on your phone or uploading a document.
  • Not keeping records long enough. Sometimes small businesses throw out receipts that could be important in future reporting, which can also cause them to lose control of spending. Accounting programmes provide a useful overview of income and expenses at any time.
  • Skipping bank reconciliation. Matching the payments in your bank statement to your invoices and expenses is a crucial but tedious step in balancing your accounts. Online accounting software like Debitoor offers automatic bank reconciliation.
  • Not using an accounting software. Finding the right software for your business can make a big impact on your accounts, especially when it comes to ease-of-use and time-saving features.
  • Combining business and personal expenses. It may seem obvious, but it’s important to keep business expenses separate. Sometimes, there might occasionally be a personal expense on your business account, in which case good accounting software can allow you to mark this as private so that it is not carried over to your business balances.

For landlords, cash accounting might come with a couple of other potential things to keep in mind. Namely, that profits can be higher due to the elimination of provisions and accruals, and that payments to any furnishings or equipment bought on finance are restricted (as compared to the full amount under UK GAAP).