What Does Making Tax Digital Mean For Landlords?
Making Tax Digital (MTD) is part of a government strategy to make it easier for businesses and individuals to keep on top of their tax affairs. It is part of a 10 year strategy to build a trusted, modern tax administration system. From a HMRC perspective it will make it much easier for them to have oversight onto the tax affairs of individuals and businesses, reducing the tax gap. HMRC introduced phase one of the scheme in 2019 and since then it has been compulsory for VAT registered businesses since then who are also above the VAT threshold. This is being extended to all VAT registered businesses from 2022. There are future plans to widen the target audience of MTD to include income tax and later corporation tax. This will have a significant impact on UK landlords who may find themselves having to produce quarterly submissions to HMRC. This article will discuss what is understood about MTD with respect to landlords as at Feb 21 and will discuss how the HMRC roll out may impact landlords. It is caveated that HMRC direction will develop over the coming months as more information is released and therefore do not take everything in this article as gospel until it is confirmed by HMRC in due course.
MTD for Income tax
MTD for income tax is being brought in from April 2023. It will apply to income from self employment (separating out trades), income from partnerships, income from property (slit into furnished holiday lets and other) and income from overseas property. If an individual has multiple streams of income which take them above the MTD threshold then there will be a requirement to submit quarterly submissions to HMRC. The threshold is > £10,000 per year. Note that for individuals with multiple streams of income there may be a requirement to produce multiple quarterly updates with separate legal obligations for each and potentially different penalties.
What does this mean for landlords?
To keep things simple, let us look at a landlord who owns property in the personnel name and their only other source of income is through a PAYE salary. This is the case with the vast majority of landlords. The earning threshold for MTD income tax is > £10,000 (this is equal to a monthly rent of £833 per year) and will apply from the tax year commencing in tax year commencing 6 April 2023. This means that a landlord who has income from even one property in certain parts of the country will breach the threshold and be required to submit quarterly returns.
Things get more complicated if a landlord has multiple streams of property income that MTD income tax rules apply to. This is because the threshold will apply to the aggregated total gross income. So for example if a landlord earns £5,000 from furnished holiday lettings and £5,000 from UK property income then this would take them above the threshold. They would then have to make quarterly submissions for the both streams of income.
Landlords who find themselves in this position should not panic but need to be prepared for the implications of MTD. Once the landlords has breached the MTD threshold the will be required to conduct the following:
Quarterly Reporting. There will be a requirement to make quarterly submissions to HMRC. The final submission will be known as an end of period statement and will be where the landlord pays their tax liability and makes claims for any allowances that they would normally on their tax return.
Digital Records. These records must include the amount, date and category of each transaction. They are likely to replicate the categories that are reported on for Self Assessment. It must include digital links from transaction record through to submissions.
Accounting Software? HMRC are trying to encourage real time information but it will be acceptable so long that it is accurate to the date of the submission. MTD creates an ideal opportunity for landlords to embrace cloud based accounting solutions which will enable them to have a better understanding of their financials and to enable them to treat property investing more like a business. It may therefore be a good time to consider adopting accounting software that is MTD compliant. Whatever your choice regarding accounting software all submission must be made using Application Programming Interface (API) compliant Software. At the most basic this could be bridging software that would effectively allow excel reports to be used by linking them to the HMRC MTD system. Integrated accounting software is likely to be the most efficient way for MTD income tax submissions but may cost more.
When will this apply? MTD for income tax will apply from the tax year commencing 6 Apr 2023. When this is applicable for landlords will depend upon when they breach the MTD threshold, which as a reminder is when the gross income from all MTD sources is above £10,000. If you breach this threshold for the first time then in order to calculate when you are in scope for MTD will be by looking back two basis periods. For example basis period 6 April 2027 – 5 April 2028 is in MTD if basis period 6 April 2025 – 5 April 2026 > £10,000. This might give landlords a bit more time before they have to implement MTD reporting. The question of what happens if you then fall under the threshold, then the policy is still under consideration but the intention is to minimise moving in and out of MTD but to allow exit in specified circumstances.
What about limited companies? HMRC have stated that MTD for corporation tax will not be introduced before 2026. This means that corporate landlords will have more time to prepare.
Conclusion. MTD income tax will have a significant impact on landlords, particularly those with more than one rental property or those with multiple streams of MTD applicable income. Rather than being seen as a threat, landlords who are serious about building a property portfolio as a business should consider embracing a cloud based accounting package that will not only keep them MTD compliant but also enable them to have creator clarity and understanding of their property financials.
Accufy Accounting have a number of sole trader and limited company cloud based products that will enable you to prepare for MTD for income tax. If you would like to talk through this with someone then please get in touch.
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