The government measures to provide tax reliefs and funding for those affected by Covid-19 do not include anything specifically relating to landlords. However, the appropriate accounting method should be considered by landlords.
Cash basis of accounting
Other than limited companies/partnerships and individuals with annual rental income of more than £150,000, landlords currently have the option of being taxed on the ‘accruals basis’ or the ‘cash basis’, the latter being the default basis.
The accruals basis is an accounting mechanism which calculates profits based on income and expenditure relating to a specific tax year, even when income is not actually received or expenses are not actually paid in that year. For example, if you were due to receive rent from your tenant for March on 1 March 2020, but you didn’t receive it until 30 April 2020, under the accruals basis it would be taxed in 2019/20 as that is the tax year in which it was due.
Using the accruals basis where tenants have delayed or stopped rent payments could result in landlords being taxed on rent which has not actually been received. Bad debt claims can ultimately be used to correct the position, but landlords would suffer a cash flow disadvantage in the short term.
The cash basis, on the other hand, calculates taxable profits only on income actually received and expenses actually paid in the tax year. Using the cash basis of accounting will allow landlords with defaulting tenants to only pay tax on rents they have actually received.
Ensuring that rental profits are calculated and taxed on the cash basis, particularly for the year starting 6 April 2020 when the drop in rental payments may be most keenly felt, will ensure that landlords are only being taxed on actual rental receipts. It is simply a question of applying the correct accounting in the transitional year and making the appropriate claim on your tax return; we can advise you on how to make the change to the cash basis if it is appropriate to do so.