Service charge - letting expense - which tax year for deduction?

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    Service charge - letting expense - which tax year for deduction?

    Hi, I am a landlord and received a service charge bill for my rental property in March 2017, which I paid on 15 April 2017. The invoice says that the service charge (which includes a sinking fund contribution) relates to the period running from March 2017 to February 2018 (so billed annually in advance).

    How should I deduct this sum? Should I expense this to:
    (1) the tax year 2016/17 because the bill was issued in March 2017, or
    (2) the tax year 2017/18 because I paid the bill after 6 April 2017, or
    (3) should I apportion the bill on a pro rata basis between the 2 tax years because it covers a one-year period running from March 2017 to Feb 2018?

    Grateful for any thoughts, thanks.

    #2
    Are your accounts on a cash basis or on an accruals basis?

    Comment


      #3
      I am of the view that as the Invoice relates to 2017/2018 and you paid it in the tax year 17/18 then it is to be included in you current tax return and not as considered as an apportionment covering the period March 17 to April 17 and the balance in 17/18.

      Comment


        #4
        The correct answer is (3), but you would probably get away with either (1) or (2), provided that the approach is consistent with how you treat other such charges and doesn't significantly affect the amount of tax you pay.

        Most charges that relate to time periods should be pro-rated to allocate the costs into the right tax year, but most people don't do that, because it's a lot of work and doesn't change how much tax is paid over time. You should do a tax year allocation for insurance premiums, council tax, mortgage fees (spread over the mortgage term) and so on.

        It is the technically correct thing to do though, even though I doubt many people do it.
        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

        Comment


          #5
          The relevant date is the invoice date. Whether the lease specified service charges in advance or in arrears (or very much in arrears in the case of a sinking fund) is completely irrelevant to this question.

          Having someone else collect your money in advance of THEIR expenditure on your behalf (perhaps 10 years in advance in the case of a sinking fund) is not relevant to the accruals/cash basis. Regardless of whether you work on a cash or accruals basis, the invoice date is the invoice date. What they do with the money (and when they actually spend it) is irrelevant.
          Imagine they collect it and only spend it 5 years later (by which time you have sold the property).

          Service charges are NOT paid for a particular period, although they are assessed based on particular rules (there is a difference). If you paid a service charge that is due now but based on a previous period, and then sold the flat 2 months later, there is no rule that you will be reimbursed by the purchaser, or that this reimbursement will be any different based on the form of the lease -- it is purely a matter of negotiation between you and the purchaser (nothing to do with the entity you paid).

          Comment


            #6
            It is the in year part that is complicated. Generally the payment is on account, and in many cases, you will get refunded the excess at the end of the years. If you sell up during the year, you will get back the proportion, for the year that was not spent.

            The sinking fund is different. That seems to be treated as transferred form the on account payment to the sinking fund evenly distributed throughout the year. Once it is in the sinking fund it is fully due.

            If you claim the whole amount against taxable income at the beginning of the year, don't forget to treat any balancing payment, to you, or amount paid in respect of the service charge, by a purchaser, as taxable income.

            Comment


              #7
              I faced this problem at the start of letting and I decided to apportion the service charge bill between 2 tax years. My thinking is that money paid in advance for a period in next year's service charge is not really an expense against rental income received in current year..

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