We receive income from the letting of a commercial site, which is declared in annual tax returns. A protracted negotiation for a rent review has led to an increase backdated to June 2016, but the arrears were not paid to us until July 2017. Should these arrears of rent be included in the 2016/17 return (to which they refer), or 2017/18 (in which they were received)? We have been unable to find anything relevant on the HMRC website, though this must be a common question.
Arthur Weller replies:
See www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1101. The standard method of accounting for rental income is the accruals basis, i.e. when the income is due, and not the cash basis, i.e. when the income is actually received. Unless the total gross annual receipts from the rental business are small, i.e. £15,000 or less. Assuming you do not fall into the 'small' category, you would need to include these rent arrears in the 2016/17 return (to which they refer). As from April 2017 the cash basis will become the default / standard method for most unincorporated property businesses with annual receipts up to £150,000 – see www.gov.uk/government/publications/calculation-of-profits-of-property-businesses/income-tax-simplified-cash-basis-for-unincorporated-property-businesses. This new rule is expected to get Royal Assent in November 2017 in the 2017 Finance Bill.
This question was first printed in Property Tax Insider in February 2018.