HM Revenue and Customs has proposed changing the way landlords pay tax, in a bid to make the system simpler.
Its proposals would mean unincorporated property businesses would be taxed on the cash basis for trading income, rather than using the accruals accounting basis.
Since 2013 some small businesses have been able to use the cash basis for calculating their profits for tax and HMRC said it now wants to extend this.
In a consultation paper, the government department said using the cash basis would make sure tax would not be paid on profits before the cash associated with those profits has actually been received, providing landlords with more certainty over their cash flow positions.
“Provisional data received from the first year of the trading income cash basis suggests that there has been a positive response, with around 1.1m small businesses opting to use the trading income cash basis,” read the document.
“The government is keen to build on the success and popularity of the trading income cash basis, to make it easier for individual landlords (or those in partnership with other individuals) to calculate their taxable income.”
It suggested that compared to the accruals accounting basis, calculating profit for tax using the cash basis requires fewer adjustments and therefore makes it simpler to prepare.
“A simpler reporting framework makes it easier for landlords to provide information and get a real-time overview of their tax affairs.”
HMRC stated a significant proportion of individuals who currently complete annual tax returns operate unincorporated property businesses.
Nearly two-thirds of these businesses have just one property, with all but a small minority having five or fewer. “They may be operated by individuals who do not even consider themselves as being in business,” the consultation added.
At the moment, property businesses must use the same accountancy rules as most other businesses when they work out their profits.
The accruals basis recognises income earned and the expenses incurred in earning that income in a period, whether or not the amounts have actually been received or paid.
HMRC estimates more than 2.5m property businesses could benefit from having the option to use the cash basis.
According to the tax office, this move would generate an extra £25m for the exchequer, although this would arise only because of some taxes being paid earlier than they otherwise would be.
