Cash vs Accruals Accounting

Confused about different accounting rules? Let’s take a look at the key differences.

In order to calculate your tax bill, your accountant will need to produce a set of accounts. For a straightforward Buy to Let, this may be nothing more complicated than a simple list of income and expenditure. For a Limited Company this will be an income statement and balance sheet to a prescribed format submitted to Companies House. 

Cash Basis

Transactions are accounted for when the cash actually leaves or is received by the business. This is the simplest method.

Accruals Basis

Transactions are accounted for in the period they relate to (matching principle). 

For example, if a tenants rent is overdue at the end of the year, this will be included in the accounts as it is still due regardless of whether the tenant has paid. This is an accrual. Under the cash basis, this would only be included when the tenant actually pays.

Likewise for payments you have made, they are matched to the period they are related to. These are known as Prepayments.

For example, if you have paid upfront for 6 months advertising at the end of the year, then under accruals, only 1 month would be included in the accounts. The remaining 5 months would be removed as ‘prepaid’. Under the cash basis all 6 months would be included when paid.

As you can imagine, the cash basis is simpler. Accruals accounting means apportioning receipts and expenses where they overlap the year end.

Since 2017, the cash basis has been the default for Landlords with personally owned property. You can elect to use the accruals basis if you prefer but we’d generally advise you to stick with the simpler cash basis.

There are specific rules regarding security deposits, use of letting agents, long leases and capital expenditure.

When should I use the accruals basis?

1. If your rental receipts are over £150k then you have to use the accruals basis.
2. Limited Companies and LLPs also have to use the accruals basis.
3. Furnished Holiday Lets (FHL) claiming Capital Allowances. One of the many tax advantages of a FHL is the ability to claim for the upfront cost of furniture, fixtures and other items used in the business. Capital Allowances only available to –
   1. Limited Companies and Furnished Holiday Lets (Ltds and personally owned)
   2. When using the accruals basis.
   3. When claiming against motor vehicles (Ltds and personally owned)

However, for FHLs using the cash basis, Capital Expenditure can generally be claimed as the full amount of capital expenditure can be deducted from the profits of the tax year when the expenditure is actually paid.

In summary, the cash basis greatly simplifies matters for most tenancy landlords. This is also the case for most Holiday Lets. However the devil is always in the detail and for more complex Capital Allowance claims, the accruals method may not only be beneficial, but mandatory for tax reasons.

Make sure you stay the right side of HMRC. Talk to us about fixed rate fees for tax and accounting solutions.