making tax digital for landlords

Making Tax Digital For Landlords

31 March 2022

Being a landlord is a rewarding role, but it is also a challenging one. Managing property rentals and keeping tenants happy is a difficult task to balance. Then, you also have your tax affairs to be in control of.

Landlords must stay up to date with taxation issues, including the Making Tax Digital process. Some landlords are registered for Making Tax Digital, and the Making Tax Digital deadline is looming for those who haven't.

With MTD for income tax, the way you submit a self-assessment tax return is changing. Your tax bill might not change much, nor how much tax you must pay, but with MTD for income tax, how you submit and pay tax might differ.

Is Making Tax Digital for landlords a legal requirement?

Whether Making Tax Digital is a legal requirement or not depends on your status in the eyes of HMRC.

The Making Tax Digital (MTD) process started in April 2019m to reduce lost tax revenue in the UK. At this time, MTD VAT started for companies whose taxable turnover stood above the limit for VAT.

As of April 2022, MTD is in effect for all VAT registered businesses. As of April 2024, MTD is appropriate for income tax for those who complete the self-assessment tax return form.

People who generate income from property, such as a landlord or property investors, also have April 2024 as their relevant start date for using Making Tax Digital. This group is referred to as MTD ITSA.

MTD is not in effect for corporation tax until April 2026, although this is a projected start date. There is a strong chance that the start date for corporation tax will be later than this.

When a person or company falls under the MTD remit, they will find keeping paper accounts and records no longer meets tax requirements.

Businesses need to select and use MTD compatible software. This facilitates record submission and updates to HMRC.

making tax digital for landlords
Photo from Andrea Piacquidio from Pexels

Who is exempt from Making Tax Digital?

As you would expect, some people are exempt from Making Tax Digital. The majority of businesses will not be exempt, but if you are looking for exemption, please consider the following points.

Exemptions for Making Tax Digital for VAT

Until 1st April 2022, only VAT registered companies whose turnover is higher than the £85,000 threshold have had to comply with MTD rules.

As of 1st April 2022, all VAT registered companies must comply with MTD regulations regardless of their turnover level.

As of November 2021, according to HMRC, around 25% of VAT-registered firms who sat below the threshold had voluntarily registered for MTD. It is also possible to voluntarily sign up for the income tax pilot scheme.

Ways people or business can claim exemption

If your business is looking for an exemption, one area to consider is whether it is not practical or reasonable for your firm to access the internet, use software or use computers.

Some of the reasons a claim of this nature might be upheld include:

  • Religious beliefs preventing people from undertaking MTD
  • The location preventing this from happening, say through not having an internet connection
  • A person’s disability prevents them from accessing a computer or the MTD compatible software
  • A person’s age prevents them from accessing a computer or eligible software

HMRC says you can apply for an exemption from MTD for VAT if it’s not reasonable or practical to use computers, software or the internet.

HMRC say they will review each case on an individual basis. A claim needs to be highly robust for an exemption to stand.

Exemptions for MTD for Income Tax

There will be a threshold in effect for MTD for ITSA.

Landlords, general partnerships and sole traders whose property or business income stands at £10,000 or less will not have to use MTD when submitting their taxes. Anyone in these categories whose income stands above £10,000 will have to operate MTD when presenting their financial returns.

Other entities exempt from MTD for ITSA, initially, include:

  • Trusts
  • Estates
  • Businesses of people who are not resident in the UK
Do you need help with Making Tax Digital for Income Tax?

There is a strong chance many landlords will have to comply with MTD expectations, and we are on hand to assist you if you need guidance.

Photo by Tara Winstead from Pexels

How landlords should deal with income tax

As a landlord, you are used to dealing with administrative matters and complying with regulations. So, you will be familiar with adapting to changes in how you file and submit income tax returns.

Annual business tax for landlords explained

Of course, this doesn’t mean that the process will be simple. If you require any assistance in managing your digital tax returns, we are always happy to help with our accounting for landlords service.

Software matters for your digital tax account

The accounting software you, or your accountant, uses must be compatible with Making Tax Digital. You are required to hold records such as expenses data or invoices digitally. Also, the landlord or their accountant must maintain these records for the appropriate length of time after the end of the relevant accounting period. At this point, the applicable span of time is five years.

Manage your tax year requirements

You must register for MTD for Income Tax before 6th April 2023. It is important to note that you will not be automatically switched over to MTD for Income Tax. Even if you are MTD registered for self-assessment purposes or MTD for VAT businesses requirements, you will have to register individual tax accounts for MTD for Income Tax.

It is expected you will not have to complete and file a self-assessment tax return for income tax purposes. However, landlords who generate income from other sources, not property rental income, might need to compile their income separately, and make a further payment. In this case, a landlord needs to submit MTD for payment and tax and an additional document for other income.

Update digital tax accounts each quarter

You will be required to use the software to provide HMRC with updates and financial records each quarter. This is the minimum expectation. If you prefer to update HMRC and report income more regularly, you can do so. For some landlords, this might be helpful.

You are not legally required to provide accurate financial records when submitting quarterly summary information to HMRC. Of course, the more precise your financial records are, the more accurate the predicted National Insurance liability and tax liability is. This is helpful if you have to plan your end of year accounting period payment to HMRC.

The tax year hasn't changed

No later than 31st January after the close of the financial year, a landlord must submit an End of Period Statement, or EOPS, to HMRC. This submission must be digital, using your chosen software.

This submission details all rental property income and allowable expenses for the landlords. These elements can be totalled in one digital tax account.

Anyone who runs a sole trader business or sole trader businesses, must submit an EOPS for each company.

The 31st January deadline is also when landlords must provide an end of year declaration of their income to HMRC. Landlords must declare any additional income at this time.

Individual tax liability isn't changing

This is also when landlords must pay National Insurance contributions and taxes. Your tax bill due date hasn't changed.

Landlords should note that the “payment on account” method remains in place. This will result in some landlords making an additional payment on the 31st of July.

How do landlords determine MTD for Income Tax income?

While the software will assist in compiling records, it is important landlords understand the process of determining MTD for Income Tax.

For landlords who don’t operate as a sole trader, they should collate the rental income they receive from the properties they let.

If the total rental income is greater than £10,000 per year, the landlord must register and use MTD for Income Tax.

Better manage your self assessment return

For landlords who are sole traders and who utilise Self-Assessment for other income generating activities, more work is required. The landlord should determine their total income. This includes rental income and sole trader income.

If the total earned by the landlord is greater than £10,000 per year, they should use MTD for Income Tax for their final declaration, including rental income and all other income.

If you have a business partnership, we can advise on all accounting relating to this set-up.

What documents and information do landlords require as part of Making Tax Digital for Income Tax?

While the nature of submitting records to HMRC is changing, the information that landlords supply isn’t going to be that different.

A landlord still has to declare the income they receive and where it originated from. For landlords who only generate rental income, this will be straightforward.

Landlords can still declare allowable expenses.

If you sell a rental property, it relates to Capital Gains Tax, not rental income. MTD will have a separate Capital Gains Tax account system in the future.

Stay in touch with Making Tax Digital for Income Tax

The most significant change with MTD for Income Tax for landlords is how often they communicate with HMRC. As opposed to sharing information annually, you can do so more regularly. At the very least, you will submit quarterly reports. If you are so inclined, you can offer information more frequently, which helps you determine your predicted tax.

Quarterly updated with MTD

One aspect of MTD that people need to be aware of is sending HMRC quarterly updates. This information provides HMRC with a relevant overview of the costs and earnings enjoyed by a company.

Each relevant business or individual needs to submit a quarterly report. Each report will be collated alongside the End of Period statement, also known as the EOPS.

What to submit with Making Tax Digital for Income Tax

After this, the relevant party needs to submit their final declaration. This declaration includes:

  • All income
  • All expenses
  • Any relevant adjustments
  • Any relevant allowances

Software options for MTD

HMRC has compiled a rundown of compatible software options, including well-known brands such as Zoho, Quickbooks and Xero.

If you already use one or some of these software options as part of your business, switching to a more digital-focused system should be straightforward. Likely, the software company has already informed you of how to best proceed to ensure you are MTD compatible.

There are costs of MTD

If you don’t already use a software programme for your tax records, you will face start-up costs.

There will be a one-off cost to purchase the software and set it up on whatever computer or computers you use. You might even need to buy a computer for this work, depending on the nature of your business.

There will also be ongoing costs to be digital compatible. Most software options feature a subscription service which means clients pay monthly or annual to access the service. If you stop paying, you can no longer access the software.

You must submit a digital tax return

If you cannot access the software, you cannot submit self-assessment information or digital tax returns, which might create significant issues for a sole trader, landlord or business.

So, you must consider the costs of MTD for your organisation.

What are the costs of MTD?

While everyone acknowledges there will be costs of MTD, there is no agreement on what these costs will be.

The Government suggests the cost will be low for small businesses. The official recommendation is that small businesses pay £70 annually over four years to comply with MTD regulations.

The Institute of Chartered Accountants in England and Wales has a different viewpoint. They reckon it will be a more expensive act for small businesses. This group states the cost for small businesses to be MTD is £1,250.

Therefore, your business must realise there is a cost associated with digital tax returns, and you should allocate funds to ensure you are eligible.

Managing digital records

The thought of having an HMRC digital account is a daunting one. Going digital for Income Tax shouldn’t be a concern, but we know digital records cause anxiety for many landlords. For all professionals.

We can help you maintain digital records and manage the process of going digital for income tax. We can advise on a partner’s digital tax account, accounting adjustments in this process and how to set up a digital account.

If you want a trusted professional to manage and maintain digital records for you, Auditox Accountancy is your specialist when going digital for income tax purposes.

Choose Auditox Accountancy for MTD for Income Tax

The mechanics of income tax self-assessment isn’t changing, but the income tax accounting process is. The new way of compiling income tax begins soon for landlords, if not already underway. Whether you need help with income tax compatible software or someone to manage your digital tax account, we can help.

Auditox Accountancy offers MTD for Income Tax support from one tax year to another. If you want peace of mind in completing your income tax self-assessment tax return, we can help. We can manage your HMRC digital tax account, ensuring you have time to focus solely on your property rental services, your tenants and rental income.

We will help you get your tax right and lower your stress in doing so. Whether you have a single rental home or more than one property, we are here to assist you.

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