Rent Payment in advance – Which tax year?

by Readers Question

4 weeks ago

Rent Payment in advance – Which tax year?

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Rent Payment in advance – Which tax year?

If rent is due monthly under the terms of an AST, but the tenant pays 6 months rent in advance then if the time period the advance rent covers straddles a tax year is the full rent recorded in the tax year it is actually received or is it applied pro-rata?

In other words, if 6 months rent is paid in January this tax year, are just Jan/Feb/Mar’s rent reported this year, with Apr/May/Jun being reported next year, or all the full 6 months rent received recorded this year.

Any help on this would be gratefully received. I’ve looked on the HMRC website but can’t see an obvious answer to this question.

Many thanks

Simon

Comments

Neil Patterson

4 weeks ago

Hi Simon,

Let me start by saying I am not an accountant, but if I invoice say an advertiser for a years worth of advertising I will pay the VAT and Corporation tax in the year I receive the funds.

Therefore, I would assume you pay tax on the rental income you physically receive that year.

I always say that a good accountant will at least save you what they cost though.

Wayne Hoban

4 weeks ago

Hi Simon,

I am not a qualified accountant, but, from experience, I have had this happen on student lets. My Ltd Co accountant pro rata'd the rent as if it was received on a monthly basis (as the AST stated) rather than as a lump sum. She is far more qualified than I on matters of taxation, and that is, afterall, what we pay accountants for.

I am not an accountant either but it depends on whether you use the traditional accrual basis or the cash basis in preparing your accounts. The cash basis is the default method for unincorporated property businesses with turnover up to £150,000, starting with the 2017/2018 tax year. For information on this see:
https://www.gov.uk/simpler-income-tax-cash-basis
https://www.gov.uk/government/publications/calculation-of-profits-of-property-businesses/income-tax-simplified-cash-basis-for-unincorporated-property-businesses

moneymanager

4 weeks ago

As Wayne says rents should be pro rata'd, you can see this from the old wear & tear legislation; and everyone does, religiously?

Quite apart from a rental business you owe tax on monies when the debt becomes due, you don't even need to raise an invoice for a liability (IT/CT/VAT) to arise; by the same token if you enter a contract for say a replacement boiler you can record the obligation then and not when you actually pay it.

So called "cash accounting" for individuals was abolished for individuals some years ago except for barristers. Oddly I think it's the OTS that just proposed cash accounting for smaller incorporated business, head spins.

Michael Barnes

4 weeks ago

Seething Landlord is correct for individuals; situation may be different if incorporated.
The following is for individuals.
Up until this tax year you were required to use the accruals basis for calculating profits, so pro-rata it.
From 2017-2018 tax year, for small lettings businesses you have the option to use the cash basis (record income and expenses when they are received/paid) or the accruals basis.
Which is best for you will depend on your tax situation.
I also believe that you cannot change back to accruals until your turnover reaches a certain level.

Michael Barnes

4 weeks ago

Reply to the comment left by Michael Barnes at 28/03/2018 - 12:51Note that pro-rata should be to the day, not to the month.
e.g. rent due in advance on 1 April (even if paid later) should be apportioned 5 days this tax year and 25 days next tax year, if using accruals basis.

Jessie Jones

4 weeks ago

Simon,
Slightly aside of your initial enquiry, but be wary of people wanting to pay 6 months in advance. It can be used by criminals seeking to use the property for cannabis grows, in the belief that if the rent is paid up, then the landlord won't feel a need to visit. In 6 months the electricity supply can be bypassed, ventilation ducting run through ceilings and walls, and a crop of cannabis grown and harvested. Profit 100k, for paying say 6k up front to a landlord! Cost of repairs 20k.
Also, despite what the AST says, if you accept 6 months rent, then before a section 21 can be issued, you need to provide 2x rental periods notice before you can start legal proceedings, i.e. 12 months. You can argue all day long that the rental period is monthly, but you will have provided sufficient doubt by accepting 6 months rent, that a court may well side with an awkward tenant. Just food for thought really.

Simon Fawkes

4 weeks ago

Hi, thanks for all your comments. It seems I should do it on a pro-rata basis.
Thanks again for your help
Simon

Michael Barnes

4 weeks ago

Reply to the comment left by Jessie Jones at 31/03/2018 - 09:59
Does the 2 times rental period apply for statutory periodic tenancies given the judgement in Spencer vs Taylor [i.e relying on S21(1), not S21(4)]?


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