Making Tax Digital (MTD) for Landlords
Written by Roulon du Toit
After the success of Making Tax Digital (MTD) for VAT, HMRC is expanding the project as part of its drive to become one the most digitally advanced tax administrations in the world.
Next up: MTD for Income Tax for self-employed business and landlords.
Originally the Government planned for these MTD rules to be followed from 6 April 2023 but as the country and business is still recovering from the Covid-19 pandemic, this has been pushed back by one year and will be mandated from 6 April 2024.
Who will be affected by MTD?
Landlords with a taxable income of more than £10 000 per year. This will include rent from both furnished holiday flats and rental properties. Landlords should also include taxable income generated from self-employment activities.
What are the main rules and changes to be aware of?
Landlords must register for MTD
Landlords must ensure that they are registered for MTD for Income Tax before 6 April 2023.
Landlords who are registered for self-assessment or even registered for MTD for VAT will not automatically be transferred across to MTD for Income Tax.
Accounting software must be MTD compliant
The software used to submit your data to HMRC must be compliant with MTD. Landlords will no longer be able to submit paper copies of their tax returns. The software will also need to retain information for a minimum period (currently 5 years).
Tax submissions every quarter and a final return
Landlords will be required to make tax submissions every quarter using MTD software. This will project the estimated tax the landlord will be expected to pay. At the end of the tax year, a final declaration must be made that finalises and adjusts the amounts reported.
This is a substantial increase to the number of submissions landlords will be required to make. Failure to make these submissions will result in penalties and interest.
The final submission must be made, and tax paid, by 31 January following the end of the tax year. The current prepayment system will continue.
Landlords may no longer need to submit a self-assessment return
For landlords whose taxes will be reported solely through MTD software, there will no longer be a need for an additional self-assessment return. This will only be the case if the landlord is not required to report any other income that does not go through the MTD channel.
What are some of the main areas we identify as practical challenges for landlords?
Submissions through the year
Many landlords are used to only “worrying” about tax submissions once a year and will now need to engage with their accountants more often.Record of income and expenses
Although it has always been a requirement to maintain records of income and expenses, there will be an increased focus on maintaining these records digitally. Landlords will need to convert and store documents electronically on a regular basis.Viewing yourself as a business
For a lot of landlords, renting out property is a casual activity. With MTD for Income Tax, there is a shift towards landlords being viewed as a business. It will no longer be appropriate to ask a tenant to “just pay for that”. Landlords require accounting packages and a plan for document retention.
What are the benefits for landlords?
Better budgeting
Because landlords will be required to make quarterly returns, this will be help them budget for the projected tax expense throughout the year.More engagement with your accounts
More submissions to HMRC means more accounts being produced. Apart from monitoring bank balances, many landlords only saw the results of their rental businesses once a year when they completed their self-assessment tax returns. The shift to MTD will help landlords identify excessive costs and how rental properties are performing.Smoother tax process
Although there is an increase in the number of tax submissions, we believe the MTD process will result in an overall smoother and fairer tax process. HMRC will increase the amount of taxes collected which makes it more equitable to those landlords who have already been paying their fair share.
MTD for Income Tax for landlords is on its way. Although it may feel like it is still some way off, landlords are encouraged to start planning for this now. Speak to your accountant about their solution for Making Tax Digital.