Category: Accounting

Property Investor or Property Trader? The 9 Factors HMRC Uses

Property investor calculating tax on a property purchase

Many property investors assume that if they buy and sell property, any profit will automatically be subject to Capital Gains Tax (CGT). Unfortunately, it isn’t that simple.

One of the most common areas of dispute between landlords, developers and HMRC is whether a property has been held as an investment or whether the owner was actually trading in property.

The difference can be extremely expensive.

If HMRC decides that you were trading rather than investing, your profits could be taxed as income rather than capital gains. Depending on your circumstances, this could significantly increase your tax bill.

So how does HMRC decide?

The answer lies in a long-established set of principles known as the “badges of trade”, together with the overall facts surrounding each transaction.

Why Does It Matter?

The distinction affects almost every aspect of taxation.

A property investor will normally pay Capital Gains Tax when selling an investment property.

A property trader will generally pay Income Tax (or Corporation Tax if trading through a company), and individuals may also be liable to National Insurance.

If you hold property personally, you may also wish to read Tax Benefits of Incorporating Your Property Portfolio.

Tax Benefits of Incorporating Your Property Portfolio – Steve J Bicknell Tel 01202 025252

The classification can also affect:

  • loss relief
  • inheritance tax reliefs
  • business asset disposal relief
  • tax planning opportunities

Getting it wrong can prove costly.

The 9 Factors HMRC Looks At

No single factor determines the answer. HMRC considers the overall picture.

1. What Was Your Intention When You Bought the Property?

This is often the most important question.

Ask yourself honestly:

  • Did you intend to rent the property for many years?
  • Or did you always hope to renovate and sell it quickly for a profit?

HMRC will often review:

  • business plans
  • finance applications
  • correspondence
  • emails
  • board minutes
  • mortgage applications

to establish what your intention was when you purchased the property.

2. How Long Did You Own It?

Generally speaking:

Long ownership periods tend to support investment.

Very short ownership periods can suggest trading.

Selling shortly after completion of refurbishment may raise questions, particularly if there was never any genuine intention to let the property.

Of course, life changes. A genuine change in circumstances does not automatically make someone a trader.

3. Did You Carry Out Significant Development Work?

Buying a tired property, renovating it and immediately selling it is one of the classic indicators of property trading.

This doesn’t mean every renovation creates a trading business.

However, repeated refurbishment followed by quick sales is far more likely to attract HMRC’s attention.

4. How Frequently Do You Buy and Sell?

One isolated sale rarely causes concern.

But a pattern such as:

  • Buy
  • Renovate
  • Sell
  • Repeat

starts to resemble a property development business rather than long-term investment.

The more frequently transactions occur, the greater the likelihood that HMRC will argue you are trading.

5. How Was the Property Financed?

Finance tells a story.

For example:

Investment indicators

  • Buy-to-let mortgage
  • Long-term repayment strategy
  • Rental income covering repayments

Trading indicators

  • Bridging finance
  • Short-term development loans
  • Repayment dependent on selling the property

The type of borrowing often reflects your original intention.

6. Does the Property Produce Rental Income?

Investment properties normally generate rental income.

If a property has never been marketed for letting and has always been prepared for resale, HMRC may question whether it was ever genuinely intended to be an investment.

Keeping evidence of:

  • tenancy agreements
  • letting agent instructions
  • advertising
  • rental business plans

can be extremely helpful.

7. What Business Are You Already In?

If you’re already:

  • a builder
  • developer
  • construction company
  • estate agent

HMRC may naturally scrutinise property purchases more closely.

That doesn’t mean you can’t own investment properties.

However, you’ll need stronger evidence showing which properties are investments and which are trading stock.

8. How Is the Property Recorded in Your Accounts?

Many people overlook this.

The way a property appears in your accounts can provide important evidence.

For example:

Investment properties are usually shown as fixed assets.

Properties intended for resale are often treated as trading stock.

Changing the accounting treatment after purchase is rarely persuasive if it doesn’t reflect the original commercial reality.

If you’re a landlord, you may also find our guide to The Biggest Tax Mistakes Made by New Landlords helpful.

The Biggest Tax Mistakes Made by New Landlords – Steve J Bicknell Tel 01202 025252

9. Why Did You Sell?

Sometimes genuine circumstances change.

Examples include:

  • divorce
  • ill health
  • relocation
  • unexpected financial pressure
  • receiving an unsolicited offer

A genuine change of circumstances doesn’t necessarily turn an investment into trading stock.

The important point is being able to demonstrate why the original plan changed.

Good documentation can make all the difference.

No Single Factor Decides the Outcome

Many people ask:

“How many properties can I sell before HMRC considers me a trader?”

Unfortunately, there isn’t a simple answer.

HMRC looks at the overall picture.

You might sell one property and still be trading.

Equally, you might sell ten investment properties over many years without ever becoming a property trader.

Each case depends on its own facts.

Practical Tips

If your intention is genuinely long-term investment, keep evidence that supports your position.

Useful records include:

  • business plans
  • mortgage offers
  • letting agent instructions
  • tenancy agreements
  • board minutes (for companies)
  • rental income records
  • correspondence showing investment intentions

These documents can become invaluable if HMRC opens an enquiry several years later.

How We Can Help

At Bicknell Business Advisers, we specialise in advising:

  • Property investors
  • Landlords
  • Developers
  • Property companies
  • Family Investment Companies
  • Property entrepreneurs

Whether you’re buying your first buy-to-let, building a development portfolio, or unsure whether your activities could be treated as trading, obtaining advice before you buy—or before you sell—can often prevent costly tax problems later.

If you’d like to discuss your property portfolio or future plans, we’d be delighted to help.

About the Author

Steve Bicknell FCMA, CGMA is Managing Director of Bicknell Business Advisers Limited, a specialist property and construction accountancy practice. Steve advises landlords, developers and property investors across the UK on tax planning, company structures, capital gains tax and Making Tax Digital, helping clients build profitable property businesses while remaining fully compliant with HMRC.

Making Tax Digital for Income Tax – Understanding Quarterly Updates

From 6 April 2026, Making Tax Digital for Income Tax (MTD for Income Tax) is mandatory for sole traders and landlords with annual income over £50,000.

Under MTD for Income Tax, taxpayers are required to keep digital records and submit quarterly updates to HMRC using MTD-compatible software. But what are quarterly updates, and when is the first filing for 2026/27 due?

What is in a quarterly update?

MTD for Income Tax requires sole traders and landlords to report on a quarterly basis to HMRC.Each update is cumulative across the year. That means that, for each update period, you will report:

  • your self-employment or property income and expenses from the previous three months,
  • plus the total of your previously reported trade or property income and expenses for the tax year,
  • and any corrections made to those figures.

No accounting or tax adjustments are necessary before sending a quarterly update to HMRC.

What are the update periods?

There are two update periods under MTD for Income Tax. The standard update period is based on the tax year, and looks as follows:

Table 1

However, if a taxpayer chooses (and if their MTD software has the capability) it’s possible to send quarterly updates on a calendar basis instead. This can be particularly useful for businesses that prepare accounts to 31 March.

The submission period for a calendar update period is:

Table 2

In both cases, the submission deadline is the same. This means a business using a calendar update period actually has a few extra days each quarter to prepare their update.

Do I need to submit anything other than quarterly updates?

Yes. After the fourth quarterly update has been filed, you should make any tax or accounting adjustments to your figures, as well as add in any additional income sources that aren’t reported as part of MTD for Income Tax (e.g. pension income, employment income, interest income etc), and claim any tax reliefs to which you’re entitled, such as capital allowances.

This is known as the ‘final declaration’ and works as the MTD version of your self-assessment tax return. The deadline to submit a final declaration is the same as the online filing deadline for self-assessment tax returns – 31 January following the tax year end.

I am a sole trader and also receive property income. Do I need to submit multiple quarterly updates?

Yes. Separate quarterly updates need to be submitted for each trade or property business. That means if you earn trading income as well as rental income, you will need to send 8 quarterly updates across the tax year.

Need help with Making Tax Digital for Income Tax?

Looking for more information on what you need to include in your quarterly updates? Book some time to speak with a member of our team today – we’d be happy to guide you through the Making Tax Digital filing process.

Massive changes under discussion for the tax of Property Investors!!

woman in white shirt showing frustration

First we had the OTS Property Income Review dated 25th October 2022, since then the Policy Paper has been issued (1st November 2022) so it looks like we will see the adoption of at least some of the recommendations in Autumn Statement on 17th November 2022.

Key findings and priority recommendations

Furnished holiday lettings

  • Short-term rentals meeting the conditions fall into the furnished holiday lettings regime. This regime provides more favourable tax treatment than the main property income rules, with more tax relief for costs, including interest, and potentially a reduced Capital Gains Tax bill on disposal.
  • The OTS recommends that the government consider whether there is continuing benefit to the UK in having a separate tax regime for furnished holiday lettings.
  • If the furnished holiday lettings regime is abolished the OTS recommends that the government consider whether certain property letting activities subject to Income Tax should be treated as trading and whether it would be appropriate to introduce a statutory ‘brightline’ test to define when a property trading business is being carried on.
  • If the regime is retained, the introduction of a private use restriction may allow for relaxation of other requirements to enter the regime, making it simpler to understand and predict whether one is in scope.
  • Should the government conclude that the furnished holiday lettings regime be retained, the OTS recommends that the government then consider:
    • removing the current distortion of allowing the regime for properties in the European Economic Area, either by permitting worldwide properties to qualify, or by limiting the regime to UK properties
    • restricting the regime to properties used for commercial letting by removing the potential for personal occupation. This would permit a simpler approach to defining the regime

Repairs, replacements, and improvements

  • A long-standing area of complexity for taxation of property is whether costs are allowable straight away as repairs and replacements, or represent capital expenditure as improvements and should be disallowed for Income Tax.
  • The OTS recommends that HMRC should enhance the guidance in respect of the boundary between repairs and improvements to include clear examples of common situations, perhaps using flow-charts to lead towards case-by-case answers.
  • The OTS recommends that the government consider introducing a broader immediate Income Tax relief for all property costs – other than where work is part of the capital cost of the building, such as the initial fit-out of properties bought in a dilapidated state or structural work such as extensions to the property.

Jointly owned property

  • HMRC data indicates that almost half (1.5 million) of all taxpayers renting out property do so jointly, mainly with a spouse or civil partner, or with others.
  • Those not married nor in civil partnership will by default declare the split of income based on beneficial ownership, but can instead choose any other split they like without any form of election.
  • Conversely, spouses and civil partners, (providing they are living together) default to equal 50:50 shares for property other than furnished holiday lets, and respondents made very clear that the process to instead use a split based on beneficial ownership (using form 17) is complex and burdensome even for advisers, and taxpayers themselves are normally unaware of the need. This creates an unnecessary complexity and burden, and potentially accidental non-compliance.
  • The OTS recommends that the government should consider removing the anachronistic 50:50 rule for spouses and civil partners and aligning treatment to that of other joint owners and to the position for spouses under Capital Gains Tax and Inheritance Tax. To prevent abuse, the default beneficial ownership position should not be capable of being displaced.
  • The government may also wish to consider removing the ability for joint owners to decide on a split other than beneficial ownership.

Making Tax Digital for Income Tax

  • From April 2024, landlords in scope of Making Tax Digital (MTD) for Income Tax will need to keep digital records and file updates quarterly using compatible software. There was a very high level of concern common to all respondents about how the rules would apply to landlords.
  • The OTS recommends that HMRC should establish a system to deal with MTD for Income Tax for jointly owned properties, for example by making a jointly owned property the MTD filing entity.
  • Landlords may rely on multiple parties to provide information and potentially to support submitting reports.
  • HMRC needs to be able to authorise MTD for Income Tax filing agents alongside tax agents. This is needed because letting agents and bookkeepers will maintain digital records and may support quarterly submissions on behalf of some landlords. Specific professional standards and responsibilities will be needed for MTD for Income Tax filing agents.
  • The gross rental limit for being required to adopt MTD for Income Tax has been set at £10,000. The evidence suggests that a landlord with such low gross rentals will have a modest net profit, if any. The OTS acknowledges that, although there would be an Exchequer impact on raising the threshold, this could be outweighed by lower customer costs, higher levels of compliance and better taxpayer and agent engagement.
  • The OTS recommends that HMRC give consideration to increasing the minimum gross income threshold for MTD for Income Tax for landlords above £10,000, at least for the medium term.
  • As is clear from the points above there are unresolved complexities within MTD for Income Tax.
  • The OTS recommends that MTD for Income Tax should not apply to landlords until these major points have been dealt with by HMRC and by a range of software providers. Time will be needed to test new systems before adoption.

These changes are huge, if implemented there will be widespread confusion about how to report property income, this is already a complex area of tax, most of these changes will probably mean property owners end up paying more tax!

steve@bicknells.net

What is Class 2 National Insurance and do Landlords need to pay it?

You make Class 2 National Insurance contributions if you’re self-employed to qualify for benefits like the State Pension.

Most people pay the contributions as part of their Self Assessment tax bill.

You pay Class 2 if your profits are £6,515 or more a year

ClassRate for tax year 2021 to 2022
Class 2£3.05 a week

So for the whole year that’s £158.60

Are you running a business?

You have to pay Class 2 National Insurance if your profits are £6,515 a year or more and what you do counts as running a business, for example if all the following apply:

  • being a landlord is your main job
  • you rent out more than one property
  • you’re buying new properties to rent out

If your profits are under £6,515, you can make voluntary Class 2 National Insurance payments, for example to make sure you get the full State Pension.

You do not pay National Insurance if you’re not running a business – even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.

As soon as you reach state pension age, you stop paying Class 2 NIC if you carry on working. You only have to pay them on any earnings that were due to be paid to you before you reached state pension age.

In addition Companies who own properties don’t pay national insurance, national insurance is only paid by employees and the self employed.

Class 2 NI would also not apply if you use a letting agent to collect the rents – average fees would be 15%, even if it is a relative or your own company as then your role will only a passive investment role.

The key case on this topic is Rashid v Garcia (Status Inspector) (2002) Sp C 348

Decision released 11 December 2002.

National Insurance – Class 2 contributions – Self-employed earner – Landlord – Taxpayer had income from letting property – Claim for incapacity benefit – class 2 National Insurance contributions paid to qualify for benefit – Revenue took view that property rental activities did not entitle taxpayer to pay class 2 contributions as he was not carrying on business – Benefit refused – Whether taxpayer was self-employed earner carrying on business – Social Security Contributions and Benefits Act 1992, s. 2, 122.

The taxpayer had four properties income £10,942.

It was estimated that the taxpayer spent two to four hours per week on managing the properties and members of his family acting on his behalf spent 16 to 24 hours per week. The Special Commissioner considered this was insufficient activity to constitute a business so no Class 2 NI was due.

Back in 2015 HMRC did try to get Landlords to pay Class 2 as explained in our blog Should Landlords pay Class 2 NI? – Steve J Bicknell Tel 01202 025252

HMRC Examples NIM23800

Samantha lets out a property that she inherited following the death of her great aunt. This will not constitute a business.

Bob owns ten properties which are let out to students. He works full time as a landlord and is continually seeking to increase the number of properties he owns for letting. Bob is running a business for NICs purposes.

Claire owns multiple properties that are let. She spends around half her working time carrying out duties as a landlord and is not looking to increase the number of properties she owns. If the only duties that Claire undertakes are those normally associated with being a landlord, then this would not constitute a business.

Hasan purchases properties using “buy to let” mortgages. He places all letting duties in the hands of a property letting agent who acts as landlord on his behalf. If the only duties that the property letting agent undertakes for Hasan are those normally associated with being a landlord, then this would not constitute a business.

steve@bicknells.net

What is the Tax Treatment of Abortive Property Investment Costs?

Most investors, whether personal landlords or companies, will have suffered some abortive costs for deals that failed.

The nature of the costs will be capital for investors.

BIM35325 – Capital/revenue divide: general themes: abortive expenditure

Expenditure that would have been capital had it been successful does not change its character merely because in the event it is abortive. ECC Quarries Ltd v Watkis [1975] 51TC153 was concerned with costs incurred in an unsuccessful planning application.

If the application had succeeded the expenditure would have been capital. In the event the application failed; no asset was acquired or modified (and the company did not rid itself of any disadvantageous asset).

What this means is that property investors don’t get any tax relief for abortive fees.

This can be extremely bad news as the case of Hardy v Revenue & Customs [2015] UKFTT 250 (TC) a 10% deposit was paid and the outcome was that HMRC disallowed the claim for relief, the taxpayer appealed and the appeal was dismissed.

It seems unfair but the seller who receives the deposit treats it as a capital gain and pays tax on it.

If a property trader/developer had suffered the loss of the deposit and the costs was ‘wholly and exclusively’ for the purpose of the trade, the expenditure might be an allowable deduction from profits.

steve@bicknells.net

  

What is a Family Investment Company/SMART Company? What do HMRC think about them?

Companies can have multiple classes of shares and the shares can have different rights. These rights cover:

  • Voting
  • Capital Growth
  • Income via Dividends

This can be of particular benefit to families.

Family Investment Companies (FICs), sometimes called Smart Companies, are particularly useful for Inheritance Tax (IHT) and have been used for over a decade as an estate planning tool.

In its simplest form parents lend money to the company and the company is owned by their adult children, but FIC’s can be structured to go beyond that with different assets and share classes.

They are a great alternative to partnerships which are taxed at income tax rates allowing faster growth as Corporation Tax starts at 19% (25% top rate) and income tax can be as high as 45%.

Capital Gains Tax is paid at Corporation Tax Rates (19%/25%) and they don’t suffer from 10 year anniversary or exit charges that are applied to Trusts.

The only slight downside is that extracting profits from a company will incur tax for the individual.

Over a period of time the income and capital shares will be moved to younger members of the family and the older members will retain the voting rights.

HMRC Family Investment Companies Unit

HMRC have been investigating FICs since 2019 and have now stopped, their findings are published in the meeting minutes 13th May 2021

In the research we undertook there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours. As with any analysis of a taxpaying population, the same broad range of tax-compliance behaviours were observed, with no evidence to suggest those using FICs were more inclined towards avoidance.


Tax risks related to FICs
The key findings in relation to the tax risks associated with FICs are outlined below:
• The use of FICs appears to be a planning strategy, often with the primary objective generational wealth transfer and mitigation of Inheritance Tax.
• There is some diversity in the way that a FIC is structured and managed, creating tax risks and compliance activity across a variety of tax regimes, including Inheritance Tax, Capital Gains Tax, Stamp Duty Land Tax and Corporation Tax.


Conclusions
The team have been subsumed into WMBC and FICs are now looked at as business as usual rather than having a dedicated team

steve@bicknells.net

What are Assets and how does depreciation work?

What is a Fixed Asset?

Fixed Assets generally include Buildings, Computers, Office Furniture, Plant, Equipment, and Vehicles. The Accounting Standards generally refer them as ‘Property, Plant and Equipment’ and in Published Accounts Assets are often called ‘Tangible Fixed Assets’.

Most business set a rule for what value an item has to be before its treated as a fixed asset, for example it might be items costing more than £200, below that value the items might be expensed in the P&L.

Fixed Assets must have a life beyond the current accounting year, for example a computer might have a life of 3 years or more.

The reason we capitalise the items and turn them into a fixed asset is so that we can apportion/spread the cost of the asset over its useful economic life. This means the accounts get a fair allocation of cost each year.

This is not the same as the tax treatment, many assets qualify for Capital Allowances and of those many might qualify for the Annual Investment Allowance. The Annual Investment Allowance gives 100% tax relief immediately.

How are Assets Depreciated?

There are several methods of depreciating assets Straight Line, Reducing Balance, Units of Production and others too. The most commonly used ones are Straight Line and Reducing Balance.

You need to use your judgement to decide the rate of depreciation, for example to depreciate straight line over 4 years you would choose 25%. Rates are normally set for an entire asset class for example Computers as a whole.

Reducing balance works by taking the net asset value and apply the depreciation %

Original Value

Less Depreciation to date (accumulated depreciation)

Net Book Value

Apply Reducing Balance Depreciation %

Every year the current year depreciation is added to the accumulated depreciation the cycle repeats each year.

Depreciation is disallowed as a tax deduction, because you claim Capital Allowances instead.

Business should maintain a Fixed Asset Register listing every asset and its Original Value, Accumulated Depreciation and Net Book Value.

When an asset is sold the value from the asset register need to be used to remove its value from the accounts, any profit or loss on disposal is posted to the P&L.

When an asset is sold there may also be a tax adjustment known as a Balancing Charge, its the difference between the Tax Written Down Value and Fixed Asset Register Written Down Value.

steve@bicknells.net

Are you missing out on Qualifying Interest Relief?

If you pay interest on a personal loan then you used to lend money to your limited company then you can probably claim tax relief on the interest that you pay on your personal loan.

Here are the rules from HS340 – You may be able to claim relief for interest paid or for alternative finance payments where the loan or alternative finance arrangement is used to:

  • buy ordinary shares in, or lend money to, a close company in which you own more than 5% of the ordinary share capital on your own or with associates
  • buy ordinary shares in, or lend money to, a close company in which you own any part of the share capital and work for the greater part of your time in the management and conduct of the company’s business, or that of an associated company
  • acquire ordinary share capital in an employee controlled company if you are a full-time employee – we regard you as a full-time employee if you work for the greater part of your time as a director or employee of the company or of a subsidiary in which the company has an interest of 51% or more
  • acquire a share or shares in, or to lend money to, a co-operative which is used wholly and exclusively for the purposes of its business
  • acquire an interest in a trading or professional partnership (including a limited liability partnership constituted under the Limited Liability Partnership Act 2000, other than an investment limited liability partnership)
  • to provide a partnership, including an limited liability partnership, with funds by way of capital or premium or in advancing money, where the money contributed or advanced is used wholly for the partnership’s business – if the partnership is a property letting partnership, read information about the residential property finance costs restriction
  • buy equipment or machinery for use in your work for your employer, or by a partnership (unless you’ve already deducted the interest as a business expense) – relief is only available if you, or the partnership, were entitled to claim capital allowances on the item(s) in question – if the equipment or machinery was used only partly for your employment, or only partly for the partnership business, only the business proportion of the loan interest or alternative finance payments qualifies for relief)

You cannot claim relief for interest on overdrafts or credit cards.

The limit on Income Tax reliefs restricts the total amount of qualifying loan interest relief and certain other reliefs in each year to the greater of £50,000 and 25% of ‘adjusted total income’.

To claim the tax relief you enter the amount of interest paid on your self assessment return under Additional Information SA101 ‘Qualifying Loan Interest Paid in the Year’.

This could be useful for Property Investors who invest via a limited company. Here is an example

Fred Smith owns his own home worth £500k without a mortgage

He borrows 75% £375k against his home and lends it to his limited company, the interest rate from his broker is 2% cheaper than borrowing in his limited company.

So he could save £7,500 a year interest

He also gets tax relief on the interest that he has paid.

steve@bicknells.net

What are Basis Periods and what will be the impact of Government Proposals to reset them? – Making Tax Digital (MTD ITSA)

Here is an example of how Basis periods work and how they create overlap periods taken from our blog What is Overlap Profit? – Steve J Bicknell Tel 01202 025252

A business commences on 1 October 2010. The first accounts are made up for the 12 months to 30 September 2011 and show a profit of £45,000.

The basis periods for the first three tax years are:

2010-2011Year 11 October 2010 to 5 April 2011
2011-2012Year 212 months to 30 September 2011
2012-2013Year 312 months to 30 September 2012

The period from 1 October 2010 to 5 April 2011 (187 days) is an `overlap period’.

It is a complicated and confusing process and the overlap profit is effectively taxed twice and given back later as tax relief.

There are two ways to gain access to your overlap relief: cease trading or change your accounting date.

The Proposal

The HMRC proposal affects the self-employed, partnerships, trusts, and estates with trading income. The proposal affects unincorporated businesses that do not draw up annual accounts to 31 March or 5 April, and those that are in the early years of trade.

Having carried out a short informal consultation with a range of businesses and tax experts, the government intends to implement the proposed reform ahead of the mandation of Making Tax Digital for Income Tax in April 2023.

The consultation period end on 31st August 2021.

Example

A business draws up accounts to 30 June every year.

Currently, income tax for 2023 to 2024 would be based on the profits in the business’s accounts for the year ended 30 June 2023. Part of the accounts are outside of the tax year, and part of the tax year is not included in profits taxed.

The proposed reform would mean the income tax for 2023 to 2024 would be based on:

3/12 of the income for the year ended 30 June 2023, plus 9/12 of the income for the year ended 30 June 24.

Basis periods are straightforward for the estimated 93% of sole traders and 67% of trading partnerships that draw up their accounts to 5 April or 31 March every year. But if a different accounting date is chosen then the rules are more complex and can be confusing for businesses to understand and apply. The rules can be particularly challenging for new or unrepresented businesses, leading to errors and mistakes in tax returns.

Aligning the basis of assessment for trading income with other forms of income enables wider, simpler reforms to be considered in the future. In particular, transitioning to the tax year basis in the tax year 2022 to 2023 will simplify the introduction and experience of Making Tax Digital for Income Tax. For simplicity, the government proposes a one year transition period, with an option to spread any excess profit arising in that transition period over five years.

The transition tax year would introduce the equivalence rule. This means that businesses can treat the end of the tax year for their tax year basis as any date between 31 March and 5 April.

Alongside this transition, the proposals would mandate that all overlap relief must be claimed in the transition tax year, including any historic transitional overlap relief, or overlap relief generated during the new transition year. No overlap relief would be carried forwards into the new tax year basis, and no new overlap relief would be generated after the transition year.

According to an article in the Law Society Gazzette 13th August

The new rule, proposed by HM Revenue & Customs under the guise of simplification, could generate a badly needed windfall of more than £1bn for the Treasury next year. 

Aligning the reporting date with the tax year would mean that profits that arise in each reporting year would be allocated to that tax year. Currently, profits are taxed for the year in which the business’s accounting period ends. Many partnerships thus end their accounting period on 30 April, allowing them 11 months’ grace. 

In summary

  • The basis period reform will apply from 2023-24.
  • There will be a transition period in 2022-23.
  • Accounting periods that end between 31 March and 4 April inclusive will be treated as ending on 5 April.
  • In the 2022-23 transition year, business profits will be reported from the end of the previous period assessed in 2021-22 up to 5 April 2023. 
    • Businesses with a 31 March 2023 accounting date will report business profits up to that date. This will be deemed to be 5 April 2023.
    • The subsequent accounting period will be deemed to start on 6 April 2023.

steve@bicknells.net

What is Cash Accounting? Accrual Accounting? Traditional Accounting?

Cash Basis Accounting

Under Cash Accounting you only report Sales when you are paid and Expenses when you pay them. This can be particularly useful if your clients take longer to pay you than you take to pay your suppliers.

Its referred to as the ‘Cash Basis’ for Income Tax and ‘Cash Accounting’ for VAT.

The ‘Cash Basis’ for the Self Employed was introduced in April 2013.

You can use Cash Basis if you:

  • run a small self-employed business, for example sole trader or partnership
  • have a turnover of £150,000 or less a year

If you have more than one business, you must use cash basis for all your businesses. The combined turnover from your businesses must be less than £150,000.

Limited companies and limited liability partnerships cannot use cash basis.

From the 6th April 2017, the Finance Bill 2017 made the Cash Basis the default basis for Landlords which means on Self Assessment returns Landlords have to tick a box to use Traditional Accounting.

HMRC believe that Cash Accounting/Cash Basis is a simpler way to prepare accounts for tax returns, in reality, I am not convinced as it can be confusing where there are management fees, rent arrears, costs covering more than a year and mortgage interest.

Joint Ownership can add to the confusion because both owners are free to make their own choice as to whether to use the Cash Basis or Traditional Accounting. The exception to this rule is married couples and civil partners who have to adopt the same approach.

VAT Cash Accounting

VAT Cash Accounting is open to all business types.

Usually, the amount of VAT you pay HM Revenue and Customs (HMRC) is the difference between your sales invoices and purchase invoices. You have to report these figures and pay any money to HMRC even if the invoices have not been paid.

With the Cash Accounting Scheme you:

  • pay VAT on your sales when your customers pay you
  • reclaim VAT on your purchases when you have paid your supplier

To join the scheme your VAT taxable turnover must be £1.35 million or less.

You must leave Cash Accounting when your Turnover hots £1.6 million.

Accrual Accounting and Traditional Accounting

These are the same thing.

The Accruals Method essential follows the principle of matching revenue and expenses in the same period.

Companies must use this method for their published accounts.

S396 Companies Act 2006 (CA 2006) (S404 for group accounts) specifies that the directors of every company have to prepare a balance sheet and a profit and loss account every financial year and that the balance sheet must give a true and fair view of the state of affairs of the company as at the end of the financial year, and the profit and loss account must give a true and fair view of the profit or loss of the company for the financial year.

In order to comply with this Directors need to enter all sales and purchases in the accounts, not just the ones that have been paid.

Accruals refers to including liabilities that you have incurred but not paid for example accountancy fees to prepare the accounts.

There could also be prepayments for things paid in advance such as insurance.

The accounts will also included items such as depreciation.

To give a True and Fair view Company Accounts are prepared to accountings standards such as FRS105 and FRS102 and UK GAAP.

steve@bicknells.net