Income Tax: deferred income

  • Thread starter Elizabeth Smith
  • Start date

E

Elizabeth Smith

Hello,

This time a very simple question ;-)

An individual has Income from Land and Property but it is paid late,
i.e. not in the year it refers to. What's the tax point?

Regards,
Elizabeth
 
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D

Doug Ramage

Elizabeth Smith said:
Hello,

This time a very simple question ;-)

An individual has Income from Land and Property but it is paid late, i.e.
not in the year it refers to. What's the tax point?

Regards,
Elizabeth
Are you using Cash or Accruals?

The IR are not happy with the former, but it depends on the amount(s)
involved.
 
E

Elizabeth Smith

Hello Doug,

Doug said:
Are you using Cash or Accruals?
I am talking about personal taxation, not business.
The IR are not happy with the former, but it depends on the amount(s)
involved.
£500/mth
 
T

Troy Steadman

Hello,

This time a very simple question ;-)

An individual has Income from Land and Property but it is paid late,
i.e. not in the year it refers to. What's the tax point?

Regards,
Elizabeth
This dovetails-in quite nicely with your WIP query. Quoting from IR
pamphlet IR150:

65. Receipts are recognised in accordance with normal accountancy
principles. This means that you include all incomings earned in the tax
year regardless of when they are due or when they are received. For a
trading or professional partnership you will normally look at the
incomings of the accounting period ending in the tax year, not the year
to 5 April (paragraph 26 onwards).

66. You don’t bring rent into a year’s tax computation merely because
you get it in the year or because it is due to be paid to you in the
year. Equally, you don’t exclude rent merely because you get it outside
the tax year or it is due outside the tax year. You bring in the
proportion of the rent which is earned in the year from the tenant’s use
of the property in the year. You exclude the proportion which is earned
from the tenant’s right to use the property outside the year.

</quote>

http://www.inlandrevenue.gov.uk/pdfs/ir150.pdf


--
 
E

Elizabeth Smith

Troy said:
This dovetails-in quite nicely with your WIP query. Quoting from IR
pamphlet IR150:
Yes, I am getting the gist of accruals accounting ... but

I'm sorry, Troy, - I've mislead you to think it's for the business again.

This question is regarding personal income tax. I heard that the income
should be taxed in the year it refers to. I just can't believe this is
true although I'd prefer it if this was indeed the case ;-)
 
D

Doug Ramage

Elizabeth Smith said:
Hello Doug,



I am talking about personal taxation, not business.


£500/mth
Schedule A changed from 1995-96, and is now broadly similar to Schedule D
Case 1 - i.e. it is treated as trading income. Therefore, Accruals is the
correct method.
 
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E

Elizabeth Smith

Schedule A changed from 1995-96, and is now broadly similar to Schedule D
Case 1 - i.e. it is treated as trading income. Therefore, Accruals is the
correct method.
Brilliant news! I'll throw a round of virtual free beer in this group ;-)

Elizabeth
 
R

Ronald Raygun

Doug said:
Schedule A changed from 1995-96, and is now broadly similar to Schedule D
Case 1 - i.e. it is treated as trading income. Therefore, Accruals is the
correct method.
Indeed, and of course if you personally rent out a property which you
personally own, you are still running a "rental business", just in
case you (ES) were thinking accruals only applied to businesses.

Strictly speaking you should accrue rent properly, which means that
if rent is earned on a per calendar month basis from a lease beginning
on the 1st of some month, then five 30ths of the April rent should be
accounted for in the old year, and 25/30 in the new year. I don't think
the taxman would worry unduly if you shifted your accounts by 5 days,
and put all the April rent into the new year. (Or if you want an easy
life, consider making your rent months always begin on the 6th).

What would worry the tax man is if the tenant is in arrears, and paid,
say, February's and March's rent, together with April's, in the middle
of April. You should account for Feb's and March's in the old year
even if not yet received.

Accruals are fun. My insurance policy document shows the period of
cover as from 29/07/03 to 29/07/04, which is odd, as you might expect
it to be from 29th to 28th if it were midnight to midnight. So I'm
guessing it's noon to noon, and I therefore apportion 251.5/366 of the
premium which I paid in July 2003 to my 2003/04 accounts and 114.5/366
of it to the 2004/05 accounts (noting that this particular insurance
year includes a 29th of Feb). Next year's split will be 250.5/365 and
114.5/365.

It'd be naughty to set a whole year's insurance premium against a part
year - just think about how it would look if you started the rental
business in mid March. Chances are you'd show a whopping loss for the
first year.
 
D

Dave T

Elizabeth Smith wrote:

This question is regarding personal income tax. I heard that the income
should be taxed in the year it refers to. I just can't believe this is
true although I'd prefer it if this was indeed the case ;-)
Generally, most income for individuals is taxed in the year of receipt
(employment income, bank interest etc.).

However, as has previously been said, Schedule A (rental income) follows
broadly similar rules to Schedule D Case I (trading income), so the
accruals basis is used and the rent will be taxed in the year it became due.

It is irrelevant whether the taxpayer considers their property income to
be a business or not.

Hope this helps.
 
E

Elizabeth Smith

Hello Ronald,

Ronald said:
Doug Ramage wrote:




Indeed, and of course if you personally rent out a property which you
personally own, you are still running a "rental business", just in
case you (ES) were thinking accruals only applied to businesses.
Indeed, I am totally flummoxed. Somebody mentioned this to me in passing
(a layman and hence he didn't use the term accruals accounting) but I
thought this was rather unlikely to be true.
Strictly speaking you should accrue rent properly, which means that
if rent is earned on a per calendar month basis from a lease beginning
on the 1st of some month, then five 30ths of the April rent should be
accounted for in the old year, and 25/30 in the new year. I don't think
I'm beginning to see why people seem to think they need an accountant
for their SA... You guys will never run out of business ;-)
What would worry the tax man is if the tenant is in arrears, and paid,
say, February's and March's rent, together with April's, in the middle
of April. You should account for Feb's and March's in the old year
even if not yet received.
More interestingly, taxing several months in the following year would
move the income to the higher tax band.
Accruals are fun. My insurance policy document shows the period of
cover as from 29/07/03 to 29/07/04, which is odd, as you might expect
it to be from 29th to 28th if it were midnight to midnight. So I'm
guessing it's noon to noon, and I therefore apportion 251.5/366 of the
premium which I paid in July 2003 to my 2003/04 accounts and 114.5/366
of it to the 2004/05 accounts (noting that this particular insurance
year includes a 29th of Feb). Next year's split will be 250.5/365 and
114.5/365.
O my God. You're not doing this by hand by any chance?
It'd be naughty to set a whole year's insurance premium against a part
year - just think about how it would look if you started the rental
business in mid March. Chances are you'd show a whopping loss for the
first year.
In this instance Hector loses out :)


While we're at it, here's another really simple personal tax question
and I bet there are exact rules for this too:

Foreign income (interest, pension): I always use the exchange rate of
the payment date. Right, wrong? In any case damned time consuming.

Thanks for your help,
Elizabeth
 
D

Doug Ramage

Elizabeth Smith said:
Hello Ronald,
While we're at it, here's another really simple personal tax question and
I bet there are exact rules for this too:

Foreign income (interest, pension): I always use the exchange rate of the
payment date. Right, wrong? In any case damned time consuming.

Thanks for your help,
Elizabeth
It's OK to use the exchange rate when the income is received.

If you receive multiple payments during the tax year, the IR publish average
exchange rates. These can be used instead. You have to be consistent.
 
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R

Ronald Raygun

Doug said:
It's OK to use the exchange rate when the income is received.
If the pension is remitted regularly, such as monthly, why not
just use the actual pound sum which pops up in the bank statement?
No need to use any exchange rate at all.
If you receive multiple payments during the tax year, the IR publish
average exchange rates. These can be used instead. You have to be
consistent.
Fortunately for mum, her foreign pension is taxed at source (i.e.
in the country of origin) and she pays no income tax on it here.
Saves a lot of bother.

Her savings are here, though, and interest is paid net, which also
saves a lot of bother. Every few years the tax man writes to say
they don't seem to have any records for her, and to ask what the
hell is going on, but I just tell them to bog off.

Works a treat. :-]

Work that one out, heh, heh! This despite the fact she's resident
and domiciled here.
 
J

Jonathan Bryce

Elizabeth said:
Foreign income (interest, pension): I always use the exchange rate of
the payment date. Right, wrong? In any case damned time consuming.
It is one of the right ways of doing it. The IR publish average rates which
you can use if it is easier.
 
R

Ronald Raygun

Elizabeth said:
More interestingly, taxing several months in the following year would
move the income to the higher tax band.
Could possibly, but it's unlikely since the loss carried forward from
last year would offset this year's excess profit.
O my God. You're not doing this by hand by any chance?
But of course. I do, however, make use of a pocket calculator.
In this instance Hector loses out :)
Not really, see above.
 
E

Elizabeth Smith

Hi Ronald,

Ronald said:
Elizabeth Smith wrote:



Could possibly, but it's unlikely since the loss carried forward from
last year would offset this year's excess profit.


Not really, see above.

The person who owns the Property wasn't aware that accruals accounting
should've been applied, and therefore didn't carry forward a loss.
Hence, the fact that he doesn't have to tax the arrears at the higher
rate will feel like a "profit" - in a non-accounting sense that is.

Actually, I'm feeling quite smug ;-)
 
E

Elizabeth Smith

Ronald said:
Doug Ramage wrote:




If the pension is remitted regularly, such as monthly, why not
just use the actual pound sum which pops up in the bank statement?
Because no £s pop up in a foreign bank statement.
Fortunately for mum, her foreign pension is taxed at source (i.e.
I'm not as old as you think ;-)
in the country of origin) and she pays no income tax on it here.
Saves a lot of bother.
Pensions are not taxed in the country of origin (not even for
residents). The friendly people at the IR have told me that it is income
and therefore has to be taxed. Annoys me silly. But I take it this is
correct?
Her savings are here, though, and interest is paid net, which also
saves a lot of bother. Every few years the tax man writes to say
they don't seem to have any records for her, and to ask what the
hell is going on, but I just tell them to bog off.

Works a treat. :-]
Not good. This sort of thing does you out of a job.
 
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T

Troy Steadman

Elizabeth Smith said:
The person who owns the Property wasn't aware that accruals accounting
should've been applied, and therefore didn't carry forward a loss.
Hence, the fact that he doesn't have to tax the arrears at the higher
rate will feel like a "profit" - in a non-accounting sense that is.

Actually, I'm feeling quite smug ;-)
I don't understand any of this, where does Ronald's "loss" come from?
You need to produce Rental Accounts to determine the profit for the year
(presumably) and at the top of his Rental Account will be the following:

Rents £6,000

less: Costs

= Profit


--
 
R

Ronald Raygun

Troy said:
I don't understand any of this, where does Ronald's "loss" come from?
You need to produce Rental Accounts to determine the profit for the year
(presumably) and at the top of his Rental Account will be the following:

Rents £6,000

less: Costs £5,000

= Profit £1,000
Now suppose £2k of the rent was paid late and (wrongly) booked
into the following year's accounts instead of this year's.
Then this year's accounts would show a £1k loss.
 
T

Troy Steadman

Now suppose £2k of the rent was paid late and (wrongly) booked
into the following year's accounts instead of this year's.
Then this year's accounts would show a £1k loss.
So why does Elizabeth say "The person who owns the Property wasn't aware
that accruals accounting should've been applied, and therefore didn't
carry forward a loss."

If he *was* aware there wouldn't have been a loss to carry forward.

If he *wasn't* aware then a loss could have arisen which he can carry
forward.



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R

Ronald Raygun

Troy said:
So why does Elizabeth say "The person who owns the Property wasn't aware
that accruals accounting should've been applied, and therefore didn't
carry forward a loss."

If he *was* aware there wouldn't have been a loss to carry forward.

If he *wasn't* aware then a loss could have arisen which he can carry
forward.
Beats me. I don't know why she said it. It doesn't seem to make sense.
If he didn't accrue the rent, there *must* have arisen a loss, or at
least a smaller profit than there should have.
 

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