Cash Basis Conundrum

Assume all references to legislation henceforth are to the Income Tax (Trading and Other Income) Act 2005 unless otherwise stated.

The cash basis for landlords requires receipts and expenses to be recognised when received and paid per s. 271D(2), and broadly, the same rules as those for computing trading as used for computing property business profits per s. 272ZA.

Hence, if the cash basis continues to be used in the 2023/24 tax year and your invoice was paid after cessation of the property letting business, it cannot be recognised as an allowable expense in computing profit to cessation. Instead, the cost will be treated as a ‘post-cessation expense’ in accordance with s. 351(2).

A post-cessation expense will only be deductible if it would have been allowed were the property letting business still being carried on per s. 254(2), e.g., it must be revenue in nature and wholly and exclusively incurred for the purposes of the business.

Broadly, any professional fee charged by yourselves as agents for preparation of the rental accounts and computation of the tax liability in respect of the property business profits will be treated as an allowable expense; see Statement of Practice 16 (1991). Any part of your fee that is not wholly related to the property letting business will be disallowed, e.g., the preparation of your client’s personal Self-Assessment tax return or any CGT computations, although HMRC does concede that where a taxpayer’s other affairs are straightforward, the non-allowable element is likely to be minimal (hence, an adjustment may be so small as to effectively be ignored). See PIM2120 and BIM46450 for HMRC’s commentary on this matter.

Post-cessation expenses are first relieved by being deducted from any post-cessation receipts received during a tax year, per ITA 2007, ss. 100 and 125. However, if there are no post-cessation receipts, then a post-cessation loss will be created, and the only alternatives to use it are:

• Where the conditions are satisfied, claim ‘post-cessation property relief’ and offset the post-cessation loss against total income. Broadly, this requires a ‘qualifying payment’ to have been made and a ‘qualifying event’ to have occurred within 7 years of cessation. Your accounting fees will not satisfy these conditions. Please see ITA 2007, ss. 96–101.

• Carry-forward the post-cessation loss to be offset against post-cessation receipts of future tax years per s. 255(2) and (3).

Effectively, your client will not be able to obtain tax relief for your professional fees paid in July 2024 unless post-cession receipts are received.

If post-cessation receipts are unlikely to arise, then an alternative approach to secure tax relief for your client would be to elect to use the accruals basis for the property business in 2023/24, assuming that:

• Under the principles of UK GAAP (broadly, FRS 102), your professional fees can be accrued for in the accounts to 30^th September 2023, and
• The relevant tax adjustments on transition to the accruals basis are made. Please see PIM1098 for further guidance on this point.

Pragmatically, a judgement needs to be made as to whether the additional tax saving available to your client will justify the further professional time/costs involved in redrafting the rental accounts and tax return on the accruals basis; i.e., is the decision commercially viable?