July 18th 2017

In this article, Steven Turnbull examines the impact of HMRC’s Making Tax Digital on Landlords in particular and encourages those of you to be prepared!

Making Tax Digital is HMRC’s project to transform the tax system and is famously associated with the claim that we will see the end of the annual tax return. However, for many landlords, this will actually mean a move to quarterly reporting rather than annual reporting as well as a move towards electronic record keeping.
This article examines how the changes will impact on Landlords and provides a useful timeline showing what will happen when and what you really do need to be prepared for.

Tax year 2017/18
The cash basis becomes the default method of taxation for eligible unincorporated property businesses. The cash basis cannot be used by companies, limited liability partnerships, partnerships with members other than individuals, trustees of trusts, and personal representatives. The initial entry limit will be annual receipts not in excess of £150,000.

Be prepared!
If you are a landlord with an unincorporated property business, where the cash basis becomes the default method in 2017/18 should consider whether you want to continue to be taxed based on generally accepted accounting practice (GAAP). You must elect to use a GAAP basis within one year of the filing date for each tax year and the digital records that will need to be kept as part of digital reporting may differ between the cash basis and GAAP basis, so this should be factored into your decision.

April 2018
As a landlord, you will have to keep digital records to enable you to start using HMRC’s new digital services to make quarterly reports to HMRC if you have profits chargeable to income tax and that your income exceeds the VAT threshold (currently £85,000).

Be prepared!
It is understood that this threshold applies per taxpayer and not per businesses. Therefore, if you have a property business with property income of £40,000 and a trade with a turnover of £50,000, you would be within the Making Tax Digital for Business regime from April 2018.

April 2019
All landlords with profits chargeable to income tax who have turnover below the VAT threshold will have to start using HMRC’s new digital services to report quarterly. VAT registered businesses will start using digital channels for their VAT reporting.

April 2020
Businesses within the Corporation Tax charge will start using digital services to report quarterly from this date, as will partnerships with a turnover of over £10 million.

Exemption for the smallest businesses
Landlords with aggregate trade and property income below £10,000 will be exempt from the quarterly reporting requirements. But please note that this applies to gross income and not the net amount after deductions for expenses, and that it is an aggregate threshold. This threshold has been criticised given that if this is the taxpayer’s only source of income, income tax would not be payable.

Be prepared!
There will be a penalty regime attaching to quarterly reporting, although it is understood that this will only apply 12 months after a business should have entered the quarterly reporting regime.

What does this mean for record keeping?
Regulations will specify the categories of income and expenditure for which records will need to be kept and preserved. HMRC has published the following indicative lists* of income and expenditure categories.

Furnished holiday letting businesses
•    Rental income and any income for services provided to tenants
•    Tax taken off income
•    Rent paid, repairs, insurance, and cost of services provided
•    Loan interest and other financial costs
•    Legal, management, and other professional fees
•    Other allowable property expenses
•    Private use adjustment
•    Premiums for the grant of a lease
•    Reverse premiums and inducements
•    Property repairs and maintenance and
•    Costs of services provided, including wages

Income from property
•    Rental income and other income from property
•    Tax taken off any income from total rents
•    Premiums for the grant of a lease
•    Reverse premiums and inducements
•    Rent, rates, insurance, ground rents, etc.
•    Property repairs and maintenance
•    Loan interest for residential properties and other related financial costs
•    Other loan interest and financial costs
•    Legal, management, and other professional fees
•    Costs of services provided, including wages
•    Other allowable property expenses and
•    Private use adjustment

It is understood that this information will not need to be stored on a property by property basis, but instead as a total for the property business. However, the software will need to store the address of each property within the property business.

What will need to be reported to HMRC and when?
Landlords will need to provide HMRC with updates every 3 months ( 4 updates a year). As property income is reported on a tax year basis, it is anticipated that the quarters for reporting property income will be 5th July, 5th October, 5th January and 5th April and that the submission deadline will be one month after the end of those quarters.

Businesses that are eligible for three line accounts will be able to submit a quarterly update with only three lines of data (income, expenses, and profit).

If an error is found to have been submitted in a previous quarterly report, it should be corrected the following quarter.

There will also be an end of year report, which must be concluded and sent either by 10 months after the last day of the period of account or 31 January, whichever is sooner.

Will Landlords pay their tax earlier?
Many have concerns that more regular reporting will mean more regular tax payments, while others may welcome making regular payments on account, like utility bills. For now, HMRC remains committed to not making any mandatory changes to payment dates. It will be introducing a voluntary facility for taxpayers to make payments on account as part of the digital tax programme. It is planned that initially, this will just cover income tax and Class 4 National Insurance contributions, as these will be the first taxes for which reporting will move onto the new digital services.

Be prepared!
Whilst landlords with trading and property income below the VAT threshold have a year of respite and will not need to start reporting quarterly until April 2019, those with aggregate income above the VAT threshold need to be looking ahead to when digital reporting starts for them in April 2018.

If you are a Landlord and would like to discuss how best to prepare for the Making Tax Digital regime, then please don’t hesitate to get in touch with one of the team at JRW who will be more than happy to advise and steer you through the process.

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.