Making tax digital (MTD) represents a major change to how most people will manage their business tax and financial affairs. It will not have touched very many property investment businesses yet, but this will change for more landlords broadly within the next couple of years.
The following is an overview of some key points.
Timetable: MTD for VAT
This is being extended ‘downwards’ to cover all VAT-registered businesses, rather than only to larger businesses making VATable supplies above the VAT registration threshold (as set into the original legislation).
Nevertheless, from April 2022 MTD for VAT will apply to any VAT-registered business, no matter how small, including those registered voluntarily.
While standard residential property businesses will not be VAT-registered (such supplies are almost all exempt from VAT), some landlords will be VAT-registered because of:
- Bed and Breakfast businesses
- Furnished holiday accommodation
- Commercial property letting (typically, but not always necessary, a VATable supply, in many cases).
Timetable: MTD for income tax
Many more property businesses will be affected by MTD for income tax. Not only will it apply to more businesses, but it will also impose further requirements on those businesses already caught by MTD for VAT.
MTD generally: Why it matters
MTD sets into law that once a taxpayer is caught by MTD, they must:
- record each single business transaction digitally – digital records and digital links;
- update their digital business or accounting records at least quarterly; and
- submit online returns to HMRC every three months for each business separately – on top of existing annual return obligations.They will also likely choose to adopt an accounting suite that has been built to be MTD-compliant – essentially, ‘HMRC-approved’.
Digital records and digital links: Hidden risk
Fundamentally, the digital records requirement means that the taxpayer may input data manually only once. The software used must be sufficiently sophisticated that all parts are updated automatically from that point onwards – so-called ‘digital links’:
- One cannot re-key data.
- One cannot ‘cut and paste’ entries between different accounting programmes.
- If you want to transfer data to your agent so they can prepare financial statements, it must be done electronically, with digital links to their software.
- All returns will have to be submitted to HMRC electronically, without any manual ‘handling’ of the records.
MTD for income tax and digital record-keeping
Most landlords are not VAT-registered, so they will not currently be making quarterly returns. Many landlords have a small number of properties and have not previously had to worry about pulling together their books and records until it is time to file their annual tax return, usually a good few months after the end of the tax year.
This will have to change, as the MTD legislation includes a requirement to update one’s business records at least in time for the next quarterly MTD return.
As MTD for income tax basically covers all business transactions, the scope of digital records and digital links is much wider than what is required for MTD for VAT.
Exceptions and easements
There are exemptions from having to operate MTD, the key ones being:
- Where total annual gross income across all businesses does not exceed £10,000 (for MTD for income tax).
- Where there are grounds by reason of age, religion, accessibility (internet, broadband, computers, etc.), or similar.
- Trusts are now exempt from MTD for income tax.
- Retail trades may summarise records, rather than having to record (say) the sale of each tin of beans separately.
MTD will force a profound and wide-ranging change to the way that most landlords keep their financial records.
Fundamentally, business owners will have to spend more time (and in most cases spend more money) to comply, with the whole point of the exercise being that they will end up paying more tax, according to HMRC.