ACCA Advanced Taxation (ATX) Practice Exam

What happens if the gross annual rents exceed £150,000 for individuals and partnerships?

1. An automatic transition to cash basis occurs.

2. They must use the accruals basis of assessment.

3. The tax authority will impose higher rates of taxation.

4. No change; both methods remain accessible.

The correct answer is: They must use the accruals basis of assessment.

Individuals and partnerships that earn gross annual rents exceeding £150,000 are required to use the accruals basis of assessment for income tax purposes. The accruals basis considers all incomes and expenses as they are incurred, regardless of when the cash is actually received or paid. This approach provides a more accurate reflection of the financial position over a period, allowing for better assessment of tax liabilities based on the actual economic activity rather than merely cash transactions. Choosing the accruals basis over the cash basis when gross rental income exceeds the threshold ensures that income is reported in the period it is earned, granting a clearer view of a taxpayer's rental profitability. This is crucial for larger operations, as it helps avoid distortions that could arise from fluctuations in cash flow, especially with the timing of rent payments and maintenance expenses. While other options suggest alternative assessments or tax implications, they do not align with the regulatory requirements that dictate the use of the accruals basis once the income surpasses the specified level. Thus, option B is accurately reflective of the legal obligations imposed on higher levels of rent income.