ACCA Advanced Taxation (ATX) Practice Exam

What basis of assessment do individuals and partnerships use for property income?

1. Accruals basis only.

2. Cash basis only.

3. Default to cash basis, unless opted for accruals when gross rents exceed £150,000.

4. Accruals basis, unless opted for cash basis without limits.

The correct answer is: Default to cash basis, unless opted for accruals when gross rents exceed £150,000.

Individuals and partnerships can opt for the cash basis of accounting for property income, which is particularly advantageous for smaller landlords. The cash basis allows them to account for income when it is actually received and expenses when they are paid, providing a straightforward method of bookkeeping that aligns with their cash flow. However, when gross rents exceed £150,000, they are required to use the accruals basis of accounting. This method recognizes income and expenses when they are incurred, regardless of when they are paid or received. This dual-method system accommodates different scales of property income management and ensures that larger property earners report a more accurate financial picture consistent with Generally Accepted Accounting Principles (GAAP). Thus, the correct choice reflects this framework, establishing that the cash basis is the default until the threshold is surpassed, at which point the individual or partnership must switch to the accruals basis unless they choose to voluntarily adopt accruals sooner. This approach serves both to simplify tax compliance for smaller earners and to uphold accounting integrity for larger operations.