What is Making Tax Digital – and what does it mean for landlords?

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Making Tax Digital is coming – in fact, if you’re VAT-registered, it’s already arrived.

You might have heard of this mysterious new scheme for paying your taxes digitally; but how does it work, and what does it actually mean for landlords and property investors?

Let’s find out…

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What is Making Tax Digital?

Making Tax Digital (or MTD) is a HMRC initiative designed to make tax more straightforward and efficient in the digital age.

Under MTD rules, businesses and sole traders are required to keep electronic records of their accounts. When MTD for income tax arrives in 2024, you’ll also need to submit your records HMRC quarterly (or in other words, four times a year) via MTD-compatible accounting software.

If you’re already using digital accounting, bookkeeping and/or spreadsheet software to manage your day-to-day company finances, you’re likely already meeting 90% of your requirements for Making Tax Digital compliance. It’s just a matter of ensuring HMRC gets that data every quarter.

Why is HMRC making tax digital?

HMRC’s initiative aims to make it easier for businesses and sole traders to manage their tax returns.

For many, the annual tax return period is a mad scramble of poring over bank statements and  tracking down invoices and receipts. 

It’s easy to accidentally skip over business costs that could be claimed as expenses to lower your tax bill, or mistakenly omit key transactions and income; the latter of which could potentially trigger a HMRC investigation into your finances.

The last-minute rush also makes it difficult to anticipate your final tax bill until it’s actually in your hands; which in turn makes it difficult to plan for the impact it might have on your company’s profits.

Making Tax Digital aims to do away with all that stress, by asking businesses to record their transactions throughout the year and check they’re up to date each quarter. Your tax bill is calculated as a running total throughout the year, too; so you’ll be able to plan your finances around it.

This doesn’t mean you’ll be charged more tax for using MTD, or that you’ll be charged tax every quarter. You’ll still only pay tax at the end of the year, and your quarterly submissions will be much easier and faster than filling in a whole self-assessment tax return.

When does Making Tax Digital start?

MTD is being gradually introduced in phases, with different starting dates for different groups and different taxes.

As of April 2022, we’re currently in ‘phase 2’ where all VAT-registered businesses and sole traders need to follow MTD rules for filing their VAT – not just those with turnover above £85,000, as was the case in phase 1.

April 2024 is the next phase on the horizon, which introduces MTD for income tax self-assessment (or MTD for ITSA). After that, MTD rules will also apply to filing corporation tax returns in 2026.

Keep in mind that these dates might be subject to change; in fact, the start date for MTD for income tax has already been pushed from April 2023 as a result of the pandemic.

Do landlords and property investors need to follow Making Tax Digital rules?

Eventually, definitely; but for now, it depends if you’re registered for VAT.

If you simply own a typical residential buy-to-let portfolio, there’s no need to be VAT-registered, which means there’s no need to submit VAT returns via Making Tax Digital.

It might be a different story if you own commercial property, or if you own a limited company for property investment or construction. Talk to a tax specialist if you’re unsure.

Of course, when the MTD for ITSA is introduced, landlords and property investors with income of more than £10,000 will need to use the system for their income tax. Property companies will also need to use MTC for their corporation tax return when that phase comes along in 2026.

Can you opt out of Making Tax Digital?

Unfortunately, the short answer is no.

MTD for VAT is now mandatory for all VAT-registered businesses, while MTD for ITSA will be compulsory for all self-employed individuals, sole traders and landlords who earn more than £10,000 each year. 

The only exception is if you’re a ‘digitally excluded’ individual; or in other words, if keeping digital records and/or reporting them to HMRC electronically isn’t reasonable or practical (for example, due to disability, age-related computer illiteracy, or a religious objection to using computers).

In this case, you can apply to HMRC for an exemption; although each application is considered on a case-by-case basis.

In the case of MTD for VAT, certain types of businesses are already exempt from filing VAT returns online; such as those on the VAT GIANT (Government Information And NHS Trust) system. If you’re already exempt, you won’t need to apply for an exemption.

And naturally, if your business is going through insolvency, you won’t need to worry about MTD.

Do I have to do all this myself?

Not necessarily! 

HMRC aims to make MTD compliance as simple as possible; but if you’d still rather not take on the responsibility yourself, an accountant can help you out with the bookkeeping and can even submit your quarterly data to HMRC as an agent on your behalf.

And that’s not all an accountant can do for your tax compliance. A good self assessment tax return accountant can also help you take advantage of relief schemes, identify allowable expenses, and uncover other opportunities to minimise your tax bills; thereby maximising your property investment returns.

GNS Associates are chartered accountants in Uxbridge; helping landlords, investors and business owners across London to take back control over their finances. Get in touch on 0208 090 2604 or email info@gnsassociates.co.uk to arrange your consultation today.

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