Alan Pink looks at the potential implications for buy-to-let landlords of ‘making tax digital’ following the recent consultation by HMRC.
Please note the quotation marks in the above title. This is, in fact, a fairly typical example of modern HMRC ‘spin’, under which you are given a sugared pill, but the promotional material (which is all that you can call it) mentions just the sugar, and not the pill.
In this case, the ‘pill’ is the ongoing proposal to make income tax payers send in quarterly returns rather than annual returns, a process which has recently been under consultation. The author’s view of this ‘making tax digital’ (often abbreviated to MTD) is that it will just multiply paperwork and aggravation for individuals and businesses, without actually making the process of tax collection any more efficient. But as politicians drool over anything which involves computers, and have already imposed head banging online submission requirements for companies, charities, VAT registered traders, and others, the chances of this particular tide being turned back seem minimal.
So what is this particular example of sugar coating the MTD pill?
On 15 August 2016, HMRC published a consultation document called ‘simplified cash basis for unincorporated property businesses’. This cash basis of working out your tax is something which has already been proposed for unincorporated trading businesses, and so what we are talking about here is extending the availability of the cash basis to buy-to-let landlords as well. Eligible small trading businesses have been able to use the cash basis since 6 April 2013.
First, though, a word about MTD. This is still in consultation, and in fact it is proposed to be brought in over a comparatively long period, not becoming fully operational until 2020. Because it’s under consultation, the final details of how it will work aren’t yet available. But the ideas are based on the usual HMRC premise that unless we all play the game, it won’t be any fun. So, there will be a requirement, if you fit in with whatever the criteria turn out to be, to provide information every quarter to HMRC, instead of doing an annual tax return. And, in conjunction with this, there will be a requirement for everyone to keep their records on computer. Computers are so much easier; don’t you see?
Is there any advantage for landlords?
Okay, my tone may seem rather negative to you, and obviously there are potential advantages to the cash basis, which one shouldn’t underestimate.
One advantage is that, as a buy-to-let landlord, you don’t have to take into account rent receipts until you actually receive them. So, a tenant who is consistently in arrears, doesn’t present the problem (which he currently does) of creating a tax charge on money that the landlord hasn’t yet received. This advantage is made great play of in the HMRC material.
Is it, in fact, though, such an advantage? After all, most of your tax for a tax year under the current self-assessment system isn’t paid until after the year is finished anyway; and if that particular tenant still hasn’t paid by 31 January after the end of the tax year, you would probably be excused for providing against a ‘bad debt’ in respect of that tenant.
Arguably more interestingly, there is a proposal (it’s all just up for discussion at the moment) to give immediate 100% relief for capital expenditure. The example which HMRC give is of a tenant who requires expensive specialist furniture to be installed, costing £15,000. A little while later, that tenant moves out and the specialist furniture is sold for £6,000. Under cash accounting as proposed, the £15,000 would be an immediate deduction against the rents, when it was paid. On the flipside, the £6,000 you would get for selling the furniture is then a taxable receipt.
The example HMRC give here is of a commercial letting, and that’s significant. Landlords of residential property are likely to be covered by the new ‘replacement’ rules which are replacing the wear and tear allowance (10% of rents) from this year.
Who will be able to use this ‘simpler’ method of tax accounting?
Basically, individuals and partnerships consisting only of individuals will be eligible. As the proposals are drafted, there’s no upper limit, although the consultation paper does ask the question as to whether we think there should be an upper limit, for example based on rental turnover. But they’re not asking us whether other types of business should be eligible, for example: companies; partnerships with company members; or trusts. Those are excluded and they don’t want our opinion on that question!
There are, inevitably, possible complications and ‘wrinkles’ with applying the cash basis in its simplest and most rigorous form. For example, what do you do about tenant deposits which are paid at the outset and held by the landlord under very stringent rules, which basically prevent him spending the deposit on anything? If you take cash accounting in its simplest form, this deposit would be taxable when received, and you would only get tax relief in the period including the end of the tenancy, when the deposit was paid back. Does it make a difference whether this deposit has to be handed over to a government approved agency to hold, or whether the landlord, in the case of a particular tenancy, is enabled to hang on to the deposit? All of these and more are issues which taxpayers and landlords may need to address in the future.
Practical Tips:
HMRC’s consultation closed on 7 November 2016, and its outcome is awaited at the time of writing.
In the meantime, if you’re a technological luddite, but have a rental portfolio which is more than of the smallest, you’re probably going to have to bite the bullet and start keeping your records on computer, however reluctantly. Early adopters will find it easier than those who leave things to the last moment!
