Election to accelerate transitional charge

Where you change from calculating your rental business profits and losses from the cash to the accruals basis, you are required to make a one-off adjustment. This is known as the transitional adjustment, which can be an addition to or a deduction from your taxable income. Where it is extra income it is spread over six tax years, but you can elect to accelerate it.

calculating the transitional adjustment

You need to make a three-step calculation to work out an adjustment:

1. Add up income you are owed which relates to a period covered by cash basis accounts.
2. Add up income received in a period covered by your cash accounts, but which relates to a period covered by the accruals basis. Add to this any amounts you owed to suppliers at the end of the last cash basis period.
3. Deduct the result of Step 2 from that for Step 1.

If the result of Step 3 is negative, you can deduct it as an expense in your first accounts prepared on the accruals basis. If the result is positive it must be taxed as income. This extra income is usually spread equally over six years, however, you can elect to accelerate the charge.

Example

Following a change of accounting basis in 2022/23 for her property rental business Diane has a transitional charge of £3,600. Normally, this would be taxed in equal instalments of £600 per year starting with 2022/23.

Within the time allowed Diane makes an election to accelerate £1,200 of the remaining adjustment for 2023/24 which increases the extra amount taxed for that year to £1,800 (£600 + £1,200). The balance of the charge £1,200 (£3,600 - £600 - £1,800) is spread over the remainder of the six-year period. This means that unless Diane makes a further election to accelerate more of the charge, the taxable amount to be added to her normal rental income for each of the years 2024/25 to 2027/28 will be £300.

The adjustment charge is taxable as follows:

2022/23 £600

2023/24 £1,800

2024/25 £300

2025/26 £300

2026/27 £300

2027/28 £300

time limit

A claim to accelerate the transitional charge must be made no later than one year after 31 January that follows the end of the tax year in which you want the accelerated amount to be taxed. For example, if you want part of the transitional charge accelerated to 2022/23 you have until 31 January 2025 to submit the election to HMRC.

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