The UK government is committed to bringing its tax system entirely online through the Making Tax Digital (MTD) initiative. With a phased rollout already underway, it is described by the HMRC as “one of the most digitally advanced tax administrations in the world” that commits to “transform tax administration so that it is easier for taxpayers to get their tax right.”
The HMRC states that the new system can help people stay away from avoidable mistakes that can cost up to billions of pounds a year in lost tax revenue. But how can this new tax rule for landlords affect their business? In this article, we explore MTD for landlords, the proposed changes at length and how to prepare for them. Let us begin:
First things first, what are the three MTD phases?
The UK government is launching the MTD initiative in phases to give everyone enough time to adjust. The three phases planned are:
- MTD for VAT: This calls for all VAT-registered businesses to share their VAT returns electronically and maintain complete digital records. MTD for VAT became mandatory from April 2022.
- MTD for Income Tax Self Assessment (MTD ITSA): This will replace the current Self Assessment returns system. Landlords and the self-employed must abide by this from April 2024, while partnerships with individual partners need to follow this from April 2025.
- MTD for Corporation Tax: This is the third stage, planned for a 2026 implementation date. More on that later.
What does MTD for Income Tax mean for landlords?
If you are a landlord with total property and/or self-employed business income greater than £10,000 a year, MTD for Income Tax applies.
Remember that MTD applies to residential property, commercial property, furnished holiday lettings, and any non-UK property you are earning rent from. It is also important to note that if you are a landlord registered as an LLC, you need to keep sending your limited company accounts and corporation tax to HMRC and Companies House.
Finally, remember that if you co-own a property with someone else, other people must register for MTD for landlord rental income tax return and report their income digitally.
What do landlords have to do once qualified for MTD for Income Tax?
If you qualify for MTD for property rental income tax, you will need to do the following from 6th April 2024:
1. Maintain digital records of your property and/or business accounts
This requires using MTD-compatible accounting software to record all transactions promptly and in the correct format. Choose one that allows you to import your bank statements (so you do not need to fill things out manually) and send out recurring invoices to your tenants for timely payment. In addition, remember that if you are a landlord and a self-employed business owner, you will need to keep separate digital records for your business and your rental property.
2. Send quarterly updates on these to the HMRC
Every three months, you must send digital business statements to the HMRC via MTD-compatible software. The deadlines for these (starting 6th April 2024) will be 5th August, 5th November, 5th February and 5th May. These will apply to landlords and any other business eligible for MTD for Income Tax.
3. Send an end-of-period statement (EOPS) and final declaration to the HMRC
The EOPS is for each income stream you have earned, and the final declaration will replace the current Self Assessment tax returns system. Submitting both will verify that the updates you have been submitting throughout the year are correct and allow you to apply for any tax relief or income relief that you might be eligible for. The deadline for submitting these and paying the tax you owe is 31st January of the subsequent year.
How can the process for MTD for Income Tax be easier?
The new requirements may sound like a lot of extra effort, but once you invest in HMRC-recognised software, maintaining records will be a breeze. The software will also compile records so you can submit EOPS and final declarations on time and in the right format. We can recommend the best software for your needs, and also save you from making common MTD for ITSA mistakes.
What happens when a landlord owns more than one property?
You report your earnings and expenses through MTD for ITSA for all properties together, so you do not need a digital account for every property. Please note that the £10,000 MTD ITSA applies per taxpayer, not per property. So it does not matter how many properties you have; if you are crossing the threshold, you must comply with MTD.
If a property belongs to a business partnership you are a part of, the partnership is responsible for MTD compliance and must be fulfilled by a nominated partner. Similarly, when you own a property for rent with a spouse or family member, each person receiving income from it must report that amount separately for MTD for property rental income tax.
When can landlords sign up for MTD for Income Tax?
While the compulsory rollout will not happen until April 2024, a pilot project has been running since 2018, and you can opt to sign up for it voluntarily. The requirements for early sign-up are:
- Being a UK resident
- Being registered for Self-Assessment as a landlord
- Having all your payments and returns sorted and up to date
We recommend you talk to your accountant first, though, as they may want to sign up on your behalf, in which case the procedure is different than if you were to do it.
The two of you can decide what is best for your specific business needs. You can always rely on the expertise of the team at Golding Accountancy. We are currently supporting landlords and the self-employed in preparing MTD ITSA. Contact us to find out more.