There’s every chance that you are not yet aware of Making Tax Digital (MTD). However, if you are a landlord with rental income – (that’s income, not profit) – greater than £10,000 annually then you should be. MTD is the biggest shake up to the UK tax system since the advent of Self-Assessment in the 1990s. And it affects you, from April 2020 at least.
MTD is the UK Government’s plan to migrate the current tax system to a fully digitised online tax system.
The new proposals confirm that landlords trading below the VAT threshold will now join MTD from April 2020 although they may opt in to MTD earlier.
Currently, landlord tax clients keep their accounting records in a number of ways; paper records, spreadsheets or accounting software. Under MTD, the Government are proposing that landlords will be required to:
- Maintain their records digitally using special software or apps;
- Report summary information to HMRC quarterly via a ‘digital tax account’
- Make an end of year declaration
Will making tax digital apply to me?
If you are in receipt of rental income annually greater than £10,000 then it will apply to you from April 2020. It’s time to start getting ready now.
What is a digital tax account?
Digital tax accounts are accessed via a secure, online portal where a property business or individual landlord can see all of their tax details in one place. They will also be able to interact with HMRC digitally. Accountants and tax advisers will be able to access some, but not all, information held therein via a new agent services account.
What are digital records?
Digital records are maintained using special online, or “cloud”, software or apps which will be available from third party software providers. HMRC have confirmed that they will not be providing their own software for MTD. If you have an accountant, they will be able to suggest a solution for you. Ideally, they would provide a degree oftraining as we will here at MAS. If you are a professional or semi-professional landlord then there are “front end” property management packages which will automatically populate MTD compliant software.
Under the original proposals, HMRC suggested that a digital record would include not only a record of each item of income and expenditure but also evidence of each transaction such as copies of invoices and receipts. In the revised proposals, the requirement to keep digital records will not include an obligation to store images of invoices and receipts digitally. I would suggest however that landlords consider this option. There now exists software and apps which not only allow you to store invoices and receipts online; they can “read” and upload the receipt, automatically categorising it. You can even set rules to automate what happens to similar receipts in the future.
Many landlords still use spreadsheets to record their data. Initially HMRC stated that these would not comply with MTD. They have subsequently backtracked… somewhat. Spreadsheet users will be required to ensure that the spreadsheet is able to meet all the necessary requirements of MTD i.e. not just keeping a record of each transaction but also providing quarterly summary updates and end of year information
How will the quarterly return work?
Once all the digital data is plugged into your chosen cloud accounting package, you (or your adviser) will be required to report this data directly to HMRC. HMRC’s analysis of the data will be similar to the current categories in the self-assessment tax return.
Landlords will have one month after the end of each quarter to compile their records and complete the update.
What if I Have multiple properties?
Where multiple properties are held within a property business or by an individual landlord, income and expenditure only has to be recorded for the property business as a whole and does not have to be allocated to individual properties. There will however, be a requirement to maintain details of each property’s address in the digital records
What if I own all or some of my properties jointly?
Firstly, there is a difference between properties owned by a partnership or simply owned jointly, such as by a married couple. The principles of the proposed system for partners and partnerships are as follows:
- The partnership, rather than each partner, will be responsible
- A nominated partner will fulfil these obligations
- There will be an option for the nominated partner to push quarterly summary information of their share of the profit to each partner’s digital tax account. With this option, each partner would have an estimate of their profit to date in the tax year.
- When the end of year declaration is made, the nominated partner will be obliged to push each partner’s share of profits to their digital tax accounts
What is the cash basis?
Alongside MTD, for unincorporated property businesses, cash basis accounting will become the default option.
The cash basis means simply that a property business accounts for income and expenses when the income is received and expenses are paid.
What are the penalties if I don’t comply?
There will be no late filing penalties for at least a year while the new system beds in. After that you will suffer penalties if you file your returns late.
Is there an upside?
Keeping digital records in real time means that landlords are less likely to lose receipts and therefore less likely to end up paying more tax than is actually due.
The data that you enter into your software will also provide reports detailing your profit (or loss) per property that will give landlords more control and better capability to forward plan with their finances and to manage their cash flow more effectively.
Keeping business records digitally means that it’s easier for a landlord to share their records with their accountant or tax adviser, saving both time and money.
Reporting quarterly to HMRC also means that you will get an estimate of how much tax you owe as you go through the year rather than waiting until after the end of the tax year.
If you currently self-file and technology really isn’t your thing, I suggest consulting an accountant sooner rather than later. No matter what you might read elsewhere, MTD for landlords is coming.