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HMRC internal manual

Property Income Manual

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HM Revenue & Customs
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Introduction: basis of assessment and time apportionment

Rental business basis periods

The current property income rules for IT payers apply for the 1995-96 tax year onwards. The basis period for 1995-96 is the tax year itself; that is, the year to 5 April 1996, and so on for later years. Generally, it is easier if taxpayers draw up their rental business accounts to the 5 April each year. But they don’t have to do this.

If taxpayers don’t draw up their accounts to 5 April each year, they will have to apportion two years’ accounts to find the profit or loss for the tax year. Apportionment must be made on a daily basis. For example, suppose accounts are drawn up to 31 December each year:

  • the basis period for (say) the 2005-06 tax year is the year ended 5 April 2006,
  • to find the profit or loss for this year you take 270 / 365 days of the accounts for year ended 31 December 2005 and 95 / 365 days of the accounts for the year ended 31 December 2006.

In a case like this the taxpayer may be unable to work out the profit or loss before the tax is due. They should pay tax on their best estimate of the final result. As a consequence they may overpay tax or underpay tax (which may lead to interest charges). A 5 April accounting date will avoid this problem and will also make the calculations a little easier.

For an example where time apportionment has not been carried out on the strict daily basis and for an explanation of why not see PIM1101. See below for more on time apportionment.

Tax year is not always basis period

The assessable figure is normally based on the income of the year ended 5 April. The exceptions are:

  • where the property income belongs to a partnership carrying on a trade or profession - see PIM1040,
  • where the income is actually trading income (and not property income as defined for tax purposes) because the letting activity amounts to a trade - see PIM4300.

Time apportionment

The charge for IT cases is on the full amount of the profits arising in the tax year - ITTOIA05/S270. The taxpayer therefore has to make a return to show the income of the year ended 5 April. However you should accept that this can be done either from accounts to 5 April, or by time apportionment between two sets of accounts drawn up to some other accounting date. You should normally expect a consistent approach to be used but do not resist a change to a 5 April accounting date.

Time apportionment need not be the method used to arrive at the income of the year ended 5 April if a better method is available - see Marshall Hus & Partners Ltd v Bolton [1980] 55TC539. In that case the company prepared one set of accounts to cover a period of more than five years. So one period of accounts covered six accounting periods. Apportionment by reference to the actual deals in each of the accounting periods gave fairer results than time apportionment.

Generally it will only be possible to work out the profits of a tax year by reference to the transactions which took place in that year where there are a small number of easily identifiable transactions. Or if, exceptionally, there were transactions disproportionally large in relation to the rest of the income (such as a premium).

This practice is given statutory effect for IT cases for 2005-06 onwards by ITTOIA05/S275.

For CT cases, ICTA88/S9 provides that ’the amount of any income shall for the purposes of CT be computed in accordance with IT principles’.