HMRC’s 12-week consultation into Making Tax Digital (MTD) published today, as part of a seven consultation package, focuses on one of the measures aimed at simplifying the tax rules for unincorporated property businesses, giving landlords the choice to use the simplified cash basis currently only available to some unincorporated traders.

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.

There are also signs that the implementation date will be pushed back a year as HMRC is calling for feedback on the impact of any delay. The government hopes to publish draft legislation in autumn 2016 for introduction in the 2017 Finance Bill.

Through using the cash basis, the move towards quarterly updates required by MTD would become more straightforward, giving landlords additional flexibility.

As part of MTD the tax system will become increasingly digital and most businesses, the self-employed and landlords will need to use software or apps to keep their business records, and to update HMRC quarterly.

The cash basis option will only be available to the simplest property businesses, such as individuals and partnerships where all partners are individuals.

HMRC claims that ‘the option to use the cash basis will make budgeting for tax easier for landlords allowing them to better manage cashflows’.

It is expected that up to 2.5m property business will use the simplified cash basis.

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.

Unlike the cash basis for trading income, HMRC is not proposing a turnover limit for landlords as their business complexity does not necessarily increase with increased turnover.

The cash basis would, as is already the case for individuals with property business income, operate by reference to the tax year (6 April to 5 April). To calculate their property business income under the cash basis, landlords would take the difference between:

• amounts actually received in the tax year in connection with the business, and
• payments actually made in the tax year to cover allowable expenses of the business.

In the UK, there are an estimated 1.4m buy-to-let landlords and one in five homes are owned as part of buy-to-let portfolios.

Mike Cherry, FSB national chairman, said: ‘Removing small firms and the self-employed with modest turnovers altogether from the proposals will now mean that in addition to the 1.6m small businesses and landlords that were already excluded, as a result of these changes announced, a further 1.3m small firms and landlords will no longer be in scope.

‘This means that half of the UK’s 5.4m small businesses will not be affected by quarterly tax reporting. The expansion of cash accounting, a longer lead-in time for implementation and the offer of direct financial assistance will also help.’

The closing date for comments is 7 November 2016. Responses should be sent to [email protected]

We are waiting on confirmation from HMRC to whether the £10,000 limit covers an individual basis or a partnership. 

The Simplified cash basis for unincorporated property businesses consultation document is here. 

The collection of Making Tax Digital consultations are here.