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HMRC Could Offer BTL Landlords "Cash Basis" Tax

According to official estimates, around one in five UK residential properties are BTL. Since the end of August, HMRC decision makers have discussed a number of issues regarding future tax organisation. They call this process Making Tax Digital, and if successful, should permit landlords to pay tax on a Cash Basis.

 

Making Tax Digital

At present, the self-employed and business owners have two options to calculate their tax method. The first is the old-style paper form submission. This has worked well for many years. Users of this system must in the details by the October after the end of the relevant tax year. The second option is web submission where the taxpayer calculates fills out the same information, but online. Here, you have until the end of January to complete the tax form. By 2020, the government expects to eliminate the old style paper form.

Making Tax Digital is not just for the self-employed. By the end of this year, everyone should have digital tax information. By 2020, this will be the sole method in use. Part of the MTD scheme is to offer Cash Basis for Buy To Let property owners.

 

What is Cash Basis?

Cash Basis is a simplified system of tax calculation that works out a tax burden based purely on the money earnt in a tax year. At present, it is available only to unincorporated businesses, sole traders, freelancers, self-employed tradesmen such as builders, electricians, plumbers and so on. It has not been available to landlords – many of whom are required to set up corporations.

Under the new scheme, the government may introduce the cash basis option for landlords with a rental income below £10,000. If you are a LLC or LLP or own multiple properties, you are unlikely to be offered this method. The threshold for other businesses presently permitted to use it is £83,000 (information correct at October 2016).

 

How Cash Basis Will Benefit You?

If your profit margin is as small as HMRC suggests it will need to be to qualify for Cash Basis, there are several substantial benefits. You should seriously consider using the scheme if you are eligible.

  • You pay tax only on that which you earn in a financial year. You will not need to pay tax on invoices sent out buy not yet paid. Nor will you have to pay tax on expected future earnings
  • Cash basis is a much simpler system. At submission, your tax return will take a lot less time to complete
  • You do not need to keep full accounts, merely receipts and records of incoming and outgoings

However, there are several drawbacks. If you require finance to expand or upgrade a property, a bank may wish to see a full account before lending. For property owners, this is the major drawback. Negotiation is expected to end around November.