Some major changes are being made to the way HMRC collects information about income from UK property from 2024 with the implementation of Making Tax Digital. This will have a huge impact on landlords – read our guide to start getting prepared.
The introduction of the Making Tax Digital (MTD) initiative is a fundamental change to the way taxpayers report to HMRC – and landlords are among the first to be affected.
What is Making Tax Digital (MTD)?
MTD will change the way the self-employed tax system works and is a key part of the Government’s ambitious plan to become one of the most digitally advanced tax administrations in the world.
It is intended to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. The system aims to help taxpayers keep digital records and use software to meet their HMRC obligations across VAT, income tax, and corporation tax. It’s believed it will also swell government coffers, as the system will help to prevent avoidable tax mistakes; estimated to be in the billions every year.
What are the changes?
The changes require all landlords with an annual rental income over £10,000 to submit a return each quarter via their HMRC digital tax account. The return shows rental income & expenditure using the same categories as the current UK Tax Return – it must be filed within 30 days of the quarter end to give ‘real time’ reporting of your tax position.
Instead of completing a self-assessment tax return on the 31st of January, you will sign a declaration that your quarterly returns are accurate and correct. You then have until the 31st of January the following year to pay your tax.
What do I do now?
The new system applies from April 2024, which seems way into the future. However, it is never too early to start getting MTD ready. Landlords can voluntarily sign up for MTD before April 2024 via the government’s website.
Before you sign up though, you must have software that’s compatible with MTD. We recommend switching to an MTD-compliant accounts system or landlord software with the required accounting capabilities soon in order to be fully prepared.
It’s important to make a note of the dates you will be required to submit your information to ensure you do not incur a late submission penalty. While you won’t be expected to submit your receipts alongside your returns, you will be required to store them digitally. Ensure you keep accurate records and report your earnings correctly.
What if I have more than one property?
If you have multiple rental properties, you do not need to set up a tax account for each one. You can total the expenses and income for all your properties in one digital tax account.
What if I have another business?
For a sole trader who uses Self-Assessment for other businesses unrelated to being a landlord, it’s a little more complicated. To work out your income for the purposes of MTD, the rental income should be combined with income from any sole trader businesses you own. If the total comes to more than £10,000, you need to register for income from your property rental, as well as from your other business(es).
What if I own a property with someone else?
The MTD process works on an individual submission basis. This means if your property is jointly owned, the income and expenditure must be proportioned between the owners
For example, with a rental property owned by a husband and wife on a 50/50 basis, both husband and wife would have to declare the property to HMRC. They divide the income and expenses by the ownership percentage of each party and submit returns for their share. If you own multiple properties and with different ownership splits this calculation needs to be done on a per property basis
If a property is owned by a business partnership, the partnership is responsible for MTD obligations, which must be fulfilled by a nominated partner. Quarterly summary information can be pushed to each partner’s digital tax account and individual tax liability calculated.
MTD for VAT
VAT-registered landlords are already following the MTD rules by using digital software and are obliged to submit returns from April 2022.
MTD for Corporation Tax
Landlords operating as a limited company to benefit from corporation tax rather than income tax rates will also be affected and will also need to prepare for the digitalisation of their systems. It is planned that a pilot scheme will be available from April 2024, with a full mandatory roll out from April 2026, when all companies will join MTD for Corporation Tax.
Keep Accurate Records
The changes to the tax system will herald a new era in keeping and submitting financial records. At Kernel we are already equipped to help our landlords maintain accurate information. We work with a highly efficient digital client accounting platform and can guarantee monthly and quarterly income & expenditure statements within days of the period end date.
This article is a guide and does not constitute legal advice. To keep up to date please refer to the current government guidance: https://www.gov.uk/government/publications/making-tax-digital
If your letting agent isn’t keeping up with legislation, then it’s probably time for a change. Contact Horizon lets today for help and advice;
- HMRC Extends Time for Landlords to Comply to New ‘Making Tax Digital’ Rules Until April 2024
- Surviving A Tax Investigation
- 10 Tax Saving Tips for Landlords
- Landlord Company Directors What Expenses Can You Claim?
- Landlord’s Guide to Letting Property