Making Tax Digital for Landlords
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.
What is Making Tax Digital and how will it affect me?
This Guide was written by Iain Rankin, Landlord Tax Adviser at TaxKings Accountants. Iain now writes for Listentotaxman.com on matters relating to property tax and landlord tax. He is very happy to speak with Listentotaxman visitors to discuss any tax questions they might have – just visit the TaxKings Accountants website for contact details.
Making Tax Digital (MTD) is the UK Government’s plan to migrate the current tax system to a fully digitised online tax system. A pipedream, you say? Australia began moves to a digital tax system in 2000 and completed the move to full digitisation some five years ago. Despite a few inevitable hiccups, it seems that, on this occasion, HMRC mean what they say. Voluntary trials have been in place since April 2018 and the indications are that HMRC are pleased with the outcome.
The Government has outlined an updated timetable this month (September 2018) illustrating how they will achieve this by 2020 and confirming that MTD will become compulsory for most landlords from 2020.
Let's kick off with some "good" news. The previous proposals saw landlords with annual rental income above £85,000 dragged into MTD from April 2019 along with VAT Registered sole traders, even though there is no VAT on non-commercial rent. 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 (don't all rush at once).
As things stand, my landlord tax clients keep their accounting records in a number of ways. These include paper records (largely the domain of the 'reluctant landlord’), spreadsheets or accounting software. These source records are then used to prepare a tax return to file online by the statutory deadline. 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
You may have heard on the news about the 'Death of the Tax Return'? That's one way of looking at it. The other is that you will now need to file five instead.
Will making tax digital apply to me?
Experience suggest that the buy to let taxpayer's natural instinct will be to assume that any such major change will apply only to the other guy with the portfolio or the property company. If you are in receipt of rental income annually greater than £10,000 - which, let's face it, is one property rental in most UK cities - 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 however it is likely that some products will be free of charge. If you have an accountant, they will be able to suggest a solution for you. Ideally, they would provide a degree of training or advice in implementing this, as my company is. If you are a professional or semi-professional landlord then there are “front end” property management packages which will automatically populate MTD compliant software.
The data required will be:
Date rentals due and payment received date if using cash basis of accounting (the default, more later)
- Rental amount
- Invoice date and expense amount
- Expense Category (to match tax return)
- Any disallowed percentage for personal use
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. This will require paying for third party apps or software. As this is likely to be more expensive than using a fully compliant solution, my advice is that It's time to bin that spreadsheet.
Property businesses will still be required to use software appropriate to their requirements. Hence, for example, a property partnership will need software that can record the partners’ details and profit shares.
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. The information that will be sent to HMRC will be summary data for the quarter, not a complete record of income and expenses. 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. I will be advising my clients that individual property records should still be maintained; after all, you want to know which rentals are making money and which ones aren't, don't you?What is an end of year declaration and how do I make it?
As well as the quarterly updates of income and expenses, landlords will be required to make an end of year declaration that everything is complete and correct. You will have until the 31st of January following the tax year to complete this end of year declaration (as it is currently).
This is useful as many property businesses will need to make adjustments to information submitted, for example reconsidering which expenses are allowable or disallowable against profit.
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 for the requirements of making tax digital (keeping a record of each transaction, providing quarterly summary updates and the end of year declaration)
- 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
The above rules apply to partnership businesses only. They do not apply to property that is jointly held. In this situation each individual who has received income from jointly held properties would report that income separately.
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. The alternative (accruals basis) means accounting for income over the period to which it relates and accounting for expenses in the period in which the liability is incurred.
Will I have to pay tax quarterly?
HMRC have stated that they have no plans to change how income tax is paid. Currently.
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. We await exact details, though the accountancy profession expects a points based system where penalties are built up for late returns and payments.
Do I really have to do this?
If you are reading this, the answer is almost certainly yes. There are very few concessions. Exemptions include:
- The ‘Digitally excluded’ - those unable to use a digital system due to disability, age, remoteness of location or any other reason,
- Individuals whose income from both property and trade added together is less than £10,000 per annum
I've read a few accountants stating that a property business with a 31 March year end rather than a 5 April year end has almost 12 more months before it has to meet the MTD requirements. This is not the case. Existing property businesses are deemed 5 April year end, so MTD applies from 6 April 2020.
Is there an upside?
Very much so. I'm sure most reading this, who currently file a tax return, have lost a potentially claimable receipt or two before getting around to collating their property records. 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, allowing your agent to focus on providing advice to save you tax, or grow your property portfolio.
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. For some people who leave their tax filing to the last minute, some nine months after the end of a tax year, there can often be problems raising funds to pay an unexpected tax bill.
MTD will mean that landlords will need to keep their accounting records in MTD-compatible software. Paper records - and spreadsheets alone - will no longer meet HMRC requirements.
There will be a requirement to submit an update from the accounting records to HMRC every three months. This does not involve making quarterly tax returns or payments but will be totals of income and expenses for each category. There will be a separate annual declaration after the end of the tax year to make any accounting or tax adjustments and to finalise the figures.
After the initial learning curve, landlords will find online filing and keeping records digitally saves time, reduces costs and can help with managing their rental properties. Your accountant or tax adviser should help you get to grips with the new digital software.
If you currently self-file and technology really isn’t your thing, I suggest consulting a cloud accountant sooner rather than later. No matter what you might read elsewhere, MTD for landlords is coming. If you've read this far, then yes, it probably applies to you.