Making Tax Digital (MTD) continues to be a key topic of discussion, especially as changes to the legislation are set to affect business owners, including landlords and agents.
MTD for Income Tax Self-Assessment will apply from April 2024 for unincorporated businesses and for landlords with a total income of over £10,000 a year. So, as accountants for landlords, we want to help you stay compliant with the latest updates.
Take a look at what’s changing and what you should keep in mind, even if you’re just starting out as a landlord.
How will Landlords be Affected?
If, as a landlord, you have a business or property rental income above £10,000 per annum, you’ll need to change the way you file your tax return by doing it digitally – you must use accounting software that is MTD-compliant, such as FreeAgent, declare your total income for the year and report to HMRC every quarter.
This means you won’t be submitting your tax return just once but will have more regular contact with HMRC, since you’re providing five reports throughout the year instead. The taxman will then give you an instant estimated tax calculation based on the information you provide.
Even if you don’t need to comply with the new MTD rules (for instance, if you have a lodger under the Rent a Room scheme, not rental properties), it’s still important that you track everything, from your expenses to your incomings – for this, using a tool like FreeAgent accounting software can be incredibly helpful.
You can see your finances in real-time, access your accounts at any moment and from any device, and have peace of mind that your information is safe. When you become a Gorilla Accounting client, you get 24/7 access to this tool, so please speak to us if you’d like to learn more about the benefits it offers.
To further your knowledge of MTD and how it can impact businesses in general, take a look at our “What is Making Tax Digital?” page.
Benefits of the New MTD Rules
According to HMRC, there are several benefits for the new rules for landlords, including MTD being “more efficient and effective” and reducing the amount of paperwork business owners need to provide.
As mentioned, your tax is also calculated immediately, so you know exactly how much you owe – and you then have until January 31st of the next year to pay your tax in most cases. You also only need one account to manage all income and expenses from your properties and, if you earn less than £10,000 then the new rules don’t apply to you.
Another benefit is that MTD makes it easier for people to check their records and to see their accounts in real-time. This can help you to make business decisions easily, especially because you’re able to quickly spot the areas that need improvement or where your business is already excelling.
Downsides of the MTD Update
However, there are also several drawbacks to the new Making Tax Digital rules, including an increase in costs for private landlords. One of these costs is having to use an MTD-compliant tool can be costly for landlords too, since HMRC doesn’t provide this type of software. We can help by offering FreeAgent to all clients who sign up with us.
Another cost is associated with the frequent returns you have to submit – instead of the single self-assessment tax return you’re used to – if you engage the services of an accountant.
A cost increase can lead to landlords selling their properties due to not turning a profit anymore – lettings agents that rely on the income from private landlords will also be affected by this.
Another disadvantage is the fact that quarterly returns increase the administrative burden for landlords. Of course, as sole trader accountants and limited company accountants, we can do this for you, freeing up your time so you can focus on your business instead.
Having quarterly returns can increase the possibility of mistakes and missed filings, which will lead to late penalties and penalties due to errors in submissions. We believe this may have a knock-on effect on the industry, though it’s impossible to tell for sure just how much the real estate and property sector will be impacted.
Engaging the services of an accountant can help you to prevent mistakes in your returns, since our expert accountants know exactly what to do (and what to look out for) to ensure error-free documents.
Penalties for Non-Compliance
HMRC will be looking to penalise for two different things: late filings and late payments. You’ll have a month after the end of the quarter to send your Making Tax Digital information and you must declare by January 31st after the end of the tax year the return belongs to that the filings are correct.
If you file your return late, you’ll get a penalty point and, if you submit two annual returns or four quarterly returns late, you’ll also have to pay an immediate fine of £200 (if you continue to submit late, you’ll be charged more penalties). If you submit several returns on time, your penalty points will eventually reset.
When it comes to late payments, HMRC charges a 5% penalty 30 days after you should have made the payment. This figure can be reduced or eliminated depending on when you end up paying what you owe – for example, if you do it between 16 and 30 days late, you may only have to pay half of the penalty.
After 30 days, additional penalties will come into play until you pay HMRC the tax you owe.
Other Challenges Landlords Face
Private landlords have been facing other challenges for a while now, not just the new MTD rules, which include:
Capital Gains Tax
Landlords must now report and pay any Capital Gains Tax within 30 days of completion, which comes with more admin – if you wish to do it all yourself, you may end up spending more time on learning the ins and outs of UK tax law than on your business, which isn’t feasible.
Talking to an accountant can ensure that all paperwork is submitted correctly and on time and that all taxes are paid before their deadlines.
Private Residence Relief
This relief means that landlords may not have to pay Capital Gains Tax or will only need to pay a reduced amount when disposing of their only or main residence. The relief, which previously covered any time living in the property and an 18-month period, has now been reduced to only 9 months, which will also affect people who don’t live in their old property but are finding it difficult to sell.
What all of this means is that you may have to pay more Capital Gains Tax a lot sooner than before.
Restriction of Mortgage Interest Relief
This relief was replaced with a 20% basic rate tax relief credit, which impacts higher and additional rate taxpayers, as they are the ones more likely to pay PAYE and to have one or two properties – meaning they hover at, or just above, the £10,000 rental income threshold for the new MTD rules.
However, don’t let this discourage you from doing what you want to do! If you’re still interested in becoming a landlord or would like to know more about keeping costs low or avoiding fees, talk to us. We work with a range of business owners, including landlords, and we can help you to make the most of your venture – and to maximise your tax efficiency.
