Be Prepared! Making Tax Digital For Landlords

Lindsey Wicks examines the impact on landlords of the revised timetable for HMRC’s ‘making tax digital’ project.

‘Making tax digital’ is HMRC’s project to transform the tax system. It is famously associated with the claim that we will see the end of the annual tax return. However, for many landlords, this actually means a move to quarterly reporting rather than annual reporting. It also marks a move towards electronic record keeping. This article examines the revised timeline for how this will impact landlords following the spring Budget 2017. 

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.

Landlords with an unincorporated property business for whom the cash basis becomes the default method in 2017/18 should consider whether they want to elect to continue to be taxed based on generally accepted accounting practice (GAAP). They must make an election to use a GAAP basis within one year of the filing date for each tax year. 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 the decision.

Landlords will have to keep digital records to enable them to start using HMRC’s new digital services to make quarterly reports to HMRC if they have profits chargeable to income tax and their income exceeds the VAT threshold (currently £85,000).

It is understood that this threshold applies per taxpayer and not per businesses. Therefore, if a landlord has a property business with property income of £40,000 and a trade with a turnover of £50,000, they would be within the making tax digital for business regime from April 2018.

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.

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

Landlords with aggregate trade and property income below £10,000 will be exempt from the quarterly reporting requirements. Note that this applies to gross income and not the net amount after deductions for expenses, and 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. Whether this threshold has been breached will need to be reviewed annually. 

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

At the time of writing, the draft regulations that will provide more detail on the requirements of digital record keeping have not been published. On 31 January 2017 when HMRC published its response to the consultation ‘Bringing business tax into the digital age’, it confirmed that:

The regulations will also set out the period for which digital records must be preserved.

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 (note that HMRC has placed a disclaimer on these lists stating that they have not been finalised).

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

Landlords will need to provide HMRC with updates every three months (i.e. four 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 5 July, 5 October, 5 January and 5 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 ten months after the last day of the period of account or 31 January, whichever is sooner.

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. As more taxes are moved onto the platform (e.g. VAT and corporation tax), payments could be allocated to those liabilities.

HMRC is also consulting on penalties, including new penalty interest. Penalty interest would be in addition to late payment interest, which is designed to provide commercial restitution for late payment. Penalty interest would be at a much higher rate than late payment interest i.e. perhaps 8% above base rate.

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. Questions that they might want to consider include: