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What is the Cash Basis For Landlords?

Landlord accounts

What accounts and records do you need to keep if you are a Landlord?

Traders have been able to prepare their accounts using the cash basis since April 2013, as long as they meet certain eligibility conditions.  This option was extended to landlords running unincorporated property businesses from 6 April 2017.

However, while traders must elect for the cash basis, it applies by default to landlords who meet the qualifying conditions.  So, if they do not want to prepare accounts using the cash basis they must elect for it not to apply.

The cash basis doesn’t apply to:

  • incorporated businesses that must continue to prepare accounts on an accruals basis
  • landlords whose annual rental income exceeds £150,000.

Cash basis v Accruals basis

Preparing accounts under the cash basis is much simpler than under the accruals basis – the cash basis simply takes account of money in and money out.  Sales are taken into account in the accounting period in which payment is received and expenditure is deducted.

By contrast, under the more usual accruals basis required under generally accepted accounting practice (GAAP), income and expenditure is matched in the period the income was earned or the expenditure incurred.

This means it’s necessary to recognise money owed and owing (debtors and creditors) and expenditure relating to different accounting periods (prepayments and accruals).

The accruals basis is sometimes referred to as the earnings basis.

The key differences

A landlord prepares accounts to 5 April each year. From 30 April 2017 onwards, he issues invoices on the 10th of each month for rent of £1,000. The invoices are paid on 10th of the following month.

In the year he has issued invoices of £12,000 (12 x £1,000) of which payment has been received for 11 months.

In February and March 2018, the landlord undertakes some maintenance work.

He receives an invoice of £750 on 16 February, which he pays on 3 March, and an invoice of £475 on 22 March, which he pays on 9 April.

The income and expenditure taken into account under the cash and accruals basis for the year to 5 April 2018 is as follows:

Cash basis Accruals basis
Income
Rent received (11 x £1,000) £11,000
Rent invoiced (12 x £1,000) £12,000
Less: expenses
Expenses paid (£750)
Expenses invoiced (£1,225)
Rental profit £10,250 £10,775

Eligibility

The cash basis applies by default to unincorporated property businesses which meet the following eligibility tests.

  • There are five tests which effectively apply to disqualify the landlord from preparing accounts using the cash basis.
  • If the landlord meets any of these tests, they must prepare accounts on the accruals basis; otherwise the cash basis applies by default.
  • Test one

The property business is carried on by a company, a limited liability partnership, a corporate firm, the trustees of a trust, or an individual’s personal representatives.

Test two

The receipts for the year, worked out using the cash basis, are more than £150,000.

Test three

The property is jointly owned with a spouse or a civil partner who is entitled to the share of the profits and the co-owner calculates their rental profits using the accruals basis.

Test four

A business premises renovation allowance is given when calculating the profits and a balancing event in the year gives rise to a balancing adjustment.

Test five

None of tests one to four apply, but the landlord has opted out of the cash basis and elected for the accruals basis to apply.

So, in summary – if the landlord does not meet any of the first four tests above and has not elected to prepare accounts under the accruals basis, the accounts must, from 6 April 2017 onwards, be prepared using the cash basis.

More than one business

If the landlord has more than one unincorporated property business, the tests are applied separately to each business.

Depending whether any are met or not, it is possible that the cash basis may be used for some businesses and the accruals basis for others.

Capital expenditure

Simpler rules also apply to capital expenditure under the cash basis. Most items can simply be deducted when computing profits.  However, this rule does not apply to certain types of capital expenditure, such as land, a car, or an asset not used in the business.

A non-depreciating asset or a financial asset cannot be deducted in computing profits, nor can expenditure on ‘special assets’, such as education or training.  Likewise, no deduction is allowed for the costs incurred in connection with the acquisition or disposal of a business.

Where a deduction has been given for an item of capital expenditure (say, a van) and that item is subsequently sold, the sale proceeds are taken into account as income when they are received.

Cars

A deduction for cars is disallowed under the cash basis capital expenditure rules.  Consequently, relief for expenditure on cars is given in the form of a capital allowance in the usual way.

Replacement of domestic items

The normal rules for relief on the replacement of domestic items in a residential let apply equally, regardless of whether accounts are prepared on the cash basis or the accruals basis.

A deduction is given for the cost of an equivalent replacement.

Interest relief

The rules for deducting interest on the cash basis are the same as under the accruals basis, with the gradual switch from relief by deduction to relief as a basic rate income tax reduction.

Entering and leaving the cash basis

Moving between the cash basis and accruals basis requires some adjustments.

When entering the cash basis, opening debtors are not counted as income when the money is received and opening creditors are not treated as expenditure when paid.

When leaving the cash basis, either because the landlord is no longer eligible or because an election is made for the accruals basis to apply, adjustments are also required to prevent double counting.

Accruals basis – should you elect?

As noted above, where the landlord qualifies for the cash basis, this will apply by default unless the landlord elects to prepare accounts in accordance with GAAP using the accruals basis.

This may be because the landlord wishes to continue preparing accounts on the same basis as previously, or because accounts on an accruals basis are required by the bank to support a mortgage application.

Alternatively, it could be because the landlord has other businesses for which the accruals basis is a must, and wishes to use the same basis for all business for consistency.

Whatever the reason, the landlord must elect within the normal self-assessment time limit, by 31 January 2019 for 2017/18.

How do you make an election? – An election can be made by ticking the relevant box on the tax return.

Fixed rate deduction for mileage

A further simplification was announced at Autumn Budget 2017.

This is to allow landlords (regardless of whether they use the cash or accruals basis) to claim a fixed-rate deduction for mileage costs rather than deducting actual costs.

The deductions mirror those available to traders and are set at:

  • 45p per mile for the first 10,000 business miles
  • 25p per mile thereafter for business travel in a car or goods vehicle
  • 24p per mile for business travel by motorbike.

However, where the cash basis is used, it is not possible to claim mileage rates where the cost of the vehicle has been deducted under the capital expenditure rules, or where the vehicle is a car, if capital allowances have been claimed.

Mileage rates can be claimed from 6 April 2017 onwards.

Getting to grips with the changes

The cash basis is already here, and landlords who have not yet taken the tests should do so to see if it applies to them. If you need help with Landlord accounts or record keeping get in touch.

 

Exit Strategy Planning

Having an exit strategy simply means having a plan to leave your business, one day. Whether you plan to sell and sail off into the sunset, or pass on to a family member, it’s worth planning well in advance – as well as thinking about continuity if you exit sooner than you expect.

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Do you need an exit strategy?
Whether you intend to leave your business in one, five, or twenty years, you’d be wise to make a plan now. It takes years, not months, to prepare a business for a new owner.

A business exit strategy will help you get ready. And it gives you freedom. If you’re ready to sell, you can do it at any time. That gives you options.

DeathtoStock_women biz
Top tips for planning an exit strategy

1. Plan for your most likely buyer
If you’re selling to family, be transparent and open – that way you don’t cause family tensions that can rumble on for years. If you’re selling to staff, expect staged payments. with a deposit and payments as agreed from future business income. If you sell to the highest bidder, make sure your accounting and business records are in excellent order.

2. Decide how soon you want to exit
Some buyers, such as family or staff, won’t have the cash to buy you out straight away. You might have to stay involved, as a consultant or employee for some time before you fully leave. If you want a clean break, then the open market, using a Business Seller will suit you best.

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3. Get your books in order
Buyers will ask to see at least two years worth of clean and dependable financial records. If your bookkeeping isn’t up to scratch then get busy fixing the problems, so any potential buyer can understand the financials at a glance – or at least with the help of their accountant. If you can improve profitability then set about doing this as soon as you can – think of it as tidying up and getting the business books in the best possible state for inspection.

4. Make yourself less significant
A business that can operate without you is what buyers want. If you are essential to the business offering then no one is going to buy the company without you too. No one’s going to buy your business off you if it can’t survive without you. If you have staff, give them the training and power they need to succeed. By cutting back on your availability to customers and delegating more, you will be on the road to creating your exit strategy.

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5. Get organised and systems in place
Ensure you have formal processes all documented – so someone taking over can see how the operation runs, in relation to the financial figures – basically, if all other things are equal, and the new owner follows your system they can expect the same results. This also allows a buyer to see how they might cut costs or merge your business into an existing one.

6. Increase the value of your business
Know the strengths in your business and see if you can maximize them in order to add value to the sale price, and deal with any weaknesses. Your accountant can help with a basic SWOT analysis and help you pull out where the value lies.

changes-to-xero

7. Get a guideline valuation
You won’t know what you’ll get for your business until the day it’s sold, but you can get a rough estimate. To get a professional opinion ask your accountant to introduce you to a local business broker or most accountants can give you a ball park guide. Once you have a realistic idea of what you could sell for it will help you plan your exit – you may need to adjust your timings or plan improvements.

8. Have a sales pitch
Everyone loves a story – make sure you can tell your business story so that a buyer is excited about where they could take the business. Gather your facts and figures to make sure the financials match the story. If you are pro actively planning your Exit Strategy think about business PR, the website and your marketing strategy – so all of these things can be of value to the next owner.

We thank our friends @Xero for the inspiration for this post and if you want to plan your Exit Strategy call us today.deathtostock_quietfrontier-12

Key Performance Indicators

What are the best ways to assess your company’s performance?

Changing market conditions and the UK position on Brexit make close monitoring of your business more important than ever.
Knowing your business’ strengths and weaknesses will help you manage your business efficiently.
There are various Apps that add-on to your accounts in Xero, to help you, and knowing where to start can be tricky. Here are our Tips to get you started on Business Performance Measurement.

Accountants and Xero Experts

 1. Think Cashflow

One of the biggest challenges is to ensure there is always enough cash to pay expenses when they are due, as running out of cash will threaten the survival of your business, more than any other factor.

Plan ahead – arrange an overdraft or invoice factoring well in advance of when you need it – to give yourself flexibility.
Keep a cashflow forecast – whether it’s scribbled down on paper or an Add-On App that takes all you accounting data and does the cash forecast for you, regularly reviewing and updating your cashflow forecasts will show the money flowing in and out of your business.

Do this on a monthly basis. Be aware of the flow, which means the actual dates you receive cash or have to pay someone for example paying PAYE Tax or Pension contributions weeks after you pay the staff.

Check your sales forecast and profits against your costs due and this should enable you to identify any potential problems before they arise.

How to make a profitable business

2. Profitability

Every business wants to increase profits. Here are some measures to consider;

• gross profit margin – the total amount after sales less direct costs
• break-even – the volume of sales needed to start making a profit
• net profits – the figure after all overheads, interest and tax deductions
• return on assets – the level of profit in relation to net assets

Measuring profitability should highlight areas for potential growth or under performing areas of your business.
Accounting ratios compare one aspect of your business against another. They make it easier to interpret financial statements by giving you a greater insight into your business’ performance.
Other important ratios to consider include:
• liquidity ratios – measures your business’ ability to pay its debts. Divide current assets by current liabilities. This tells you if you have enough assets to cover your liabilities when they fall due.
• efficiency ratios – measure how well you are utilizing your business assets.

Top tips from the cafe accountant

3. Customer

There’s no business with out customers who want to buy what you sell. Retaining existing customers is as important as attracting new ones, so treat them well and check if you are meeting their expectations. Know your client types, groups and top 5.

Staff and HR issues

4. Staff

The more successful you are the more staff you are likely to take on. Scaling up can mean fast training and cultural change. Set performance targets and development opportunities.

Another thing to consider is how your staff reflect the identity and brand of your business, particularly if they are dealing with customers. Even the smallest one person business has built an identity, usually based on the owners personality and attitudes – so match or train your team to stay true to what you want.

5. Benchmarking

Benchmarking measures your company’s performance against your competitors.  It enables you to find ways to improve performance and understand different approaches to achieve best practice or keep up.

If your business is a member of a trade association, you may be able to access industry-wide statistics, or your accountant may offer a benchmarking service where you can be measured against other businesses.  Strategic benchmarking is about measuring yourself against the best in class performers in your sector. Most small business benefit from analyzing competitor data and finances that are in the public domain.

Any of the above can be done on a DIY basis if cash is a problem and you have the time and expertise. Or you can ask your Xero Accountant to advise on the best place for you to start.

Benchmark against competitors

6. The small things

Don’t forget – all things are possible from your financial data IF you keep your processing up to date. Paying attention to the little details and keeping up to date mean you can undertake analysis any time you want.

If you need help getting up to date and getting to grips with your business finances please give us a call.

Bookkeeping Matters