Advanced rent leads to higher net tax?

Hi Ron,

To get definitive professional insured advice you will need to rely on an accountant you contract to submit and understand all your accounts and how they are declared.

However, please see my Editors Notes above at the bottom of your article.

It may be that if you have only ever submitted rental accounts as a landlord that HMRC have assumed you are working on a Cash Basis so you need to be sure HMRC are aware and happy if you are to try to pro rata the payment allocating to the corresponding months.

In my experience a good accountant will always at least save you what they cost so it is not worth the risk of going alone.

I think you will find it's either cash accounting or accrual accounting. You can't pick and mix. But I wonder where the point of payment is? If on receipt of rent from the agent then maybe an arrangement for them to trickle the money to you on a monthly basis could be arranged. There would be associated risks, i.e. if the agent went into liquidation etc. However, if the agent is collecting rent on your behalf it would suggest this would not be acceptable. Any accountants out there?

Reply to the comment left by Rob Crawford at 17/10/2019 - 11:27
I like that idea and I think it could solve the problem.

To mitigate risk of the failure of the Agent, I suggest it is imperative to ensure the Agent maintains a valid Cluent Money Protection insurance policy and is also a Member of ARLA or NALS or RICS.

Unfortunately I don't think that works because this is a one-off situation that has already happened. The advance 6 months rent was received by the letting agent in 2018 and since my relative did not question it at the time, I think it is now set in stone.
It would solve the problem:-
1. If we are allowed to use Cash Basis for 2018-19 except for treating just this advance rent payment on a pro-rata basis, OR
2. If we can use Accrual for 2018-19 but then revert to Cash Basis for 2019-20. I don't quite see how to do that, though. Accrual for 2018-19 would mean taking about 1/6th of the payment in 2018-19 and deferring 5/6ths to 2019-20. However, Cash Basis for 2019-20 would imply ignoring the 5/6ths because it wasn't actually received in 2019-20 - which, obviously HMRC wouldn't let us do since we'd be escaping the tax on it altogether.
Common sense says either do 1 above (just make a pro-rata exception to Cash Basis in 2018-19) or do 2 above and make an exception for the 5/6th in 2019-20. The question is whether HMRC's rules obey common sense!

why not continue using accrual going forward?, its not that complicated you just need to identify bills invoiced but not paid in a tax year and if you are likely to have a similar situation in the future it might be better. When MTD gets rolled out to landlords they will want you to pay tax quarterly - if you are on a cash basis and have annual expenses that could lead to big bills for a couple of low bill quarters and not enough in the bank for the annual buildings insurance for example.

Reply to the comment left by Ron Bell at 17/10/2019 - 15:53
There is a box that you have to tick on the self-assessment form to say whether you have used the cash basis so I am certain that you cannot have any income or expenditure treated differently within the same tax year, it is all or nothing. When you switch from one basis to the other you have to make adjustments so that you end up paying the correct amount of tax overall This would normally be a one-off exercise although you would have to change back to the accruals basis if your rental income reached the prescribed level.
Having started to use the cash basis a couple of years ago I felt it necessary to refuse an offer of 6 months rent in advance for a tenancy starting in March this year as it would have meant it being taxed as received in total in the 2018 to 2019 tax year which would have been problematic.

I believe that once you have switched to the cash basis you have to stick with it until circumstances change to make accruals basis mandatory.

One option might be to pretend that it did not happen, but if HMRC decide to audit you, then ...

Would it be naive to think that the HMRC would apply the same rules to income as they do for expenses? If they are consistent then you could use this explanation, as the HMRC rule for expenses says:
"If an expense covers more than one accounting period, you’ll need to spread that cost."
"For example, if your rent is payable 12 months’ in advance halfway through your accounting period, include half of the rent payable in the previous accounting period and half of the rent payable in this accounting period as an expense in your accounts for this year."
"Include the other half of the rent payable in this accounting period in your accounts for next year."

https://www.gov.uk/government/publications/how-to-calculate-your-taxable-profits-hs222-self-assessment-helpsheet/hs222-how-to-calculate-your-taxable-profits-2018--2#expenses

Reply to the comment left by Peter G at 19/10/2019 - 09:19
It is not naive because that is precisely what HMRC do i.e. income and expenses are dealt with in the same way, either apportioned between tax years (accruals basis) or accounted for as received or incurred on the day of the transaction (cash basis). The guidance you have quoted describes what happens if you are using the accruals basis. If using the cash basis you should claim the whole rent as an expense incurred on the day that you paid it. That is my understanding but please do not rely on it - if in doubt take professional advice.

If you don’t normally have advance payments then ordinarily there perhaps wouldn’t be any difference between the cash and traditional method ?

Therefore you have probably adhered to the traditional method even though you’ve been telling yourself that you’ve been doing the cash approach.

So perhaps it would not be a problem to apply the traditional approach to this one off payment ?

Pure speculation on my behalf I should add !