Along with more regular real estate tax changes, HMRC is currently implementing an ambitious Making Tax Digital scheme which will move all tax administration to a new digital system. From the 6th of April 2023, it will apply to all self-employed, partnerships, and landlords whose combined gross income for the year exceeds £10,000.
HMRC believes this will reduce bookkeeping errors and make compliance easier for businesses and individuals that are self-employed. Taxpayers will be required to record all their accounts in a digital format and submit their accounts via an approved software for review every quarter.
HMRC is not providing software to enable submissions, so landlords will need to look for commercially viable solutions such as Landlord Studio to manage their accounts digitally. If you do decide to continue to use spreadsheets you will need to use bridging software to link to the MTD servers and manage your returns.
In this article, we explore what exactly this change to MTD means for landlords and what you need to do to stay compliant with HMRC’s new system.
What should landlords know about MTD?
Maintain Digital Records
Landlords are required to keep digital records of VAT data in order to submit their periodic updates to HMRC. The first step is to find a solution that works for you that will allow you to easily and efficiently keep digital records. The solution you find should allow you to implement accounting best practices for your rental businesses such as digitising receipts, and real-time income and expense tracking.
In order to submit updates directly to HMRCs system, landlords will need to use an approved software. You will still be able to use Excel, however, this is not recommended and in order to submit your tax return, you will need to use a bridging software that is connected to HMRC’s API.
You will be required to use your chosen approved software to submit your tax return every three months. With this set up you will need to submit at least five returns in total, once quarterly and a final end of year return.
Register for MTD
You should familiarise yourself with the process of submitting updates and make sure you are registered for MTD with HMRC. You can register for the digital tax service through your existing Government Gateway account.
Who Do The New MTD Rules Apply To?
These new MTD rules are being phased in by HMRC and already apply to most VAT registered businesses. However, they have extended their timeline so that this doesn’t yet affect individuals that are self-employed or most landlords.
The first phase of the rollout was carried out in April 2019. All VAT registered businesses earning above the threshold of $85,000 have needed to comply with the MTD rules and use approved software to periodically submit their returns.
The second phase is being implemented in April 2023 and applies to the following two groups:
- Self-Employed – from April 2023 self-employed, with turnover above £10,000 per year.
- Landlords – from April 2023 Landlords with rental income above £10,000 per year will need MTD approved software.
Income, Expenses, And Taxes In Real-Time
HMRC hopes that the system of continuous updates will force people to keep regularly updated books and adopt software that will allow them to update their records in real-time. The advantage of this is it means business owners or landlords are much more likely to have accurate up to date books and they won’t miss important expenses, lose receipts, or be tempted to guesstimate figures.
This will lead to more accurate taxes with fewer errors. If landlords adopt a good solution that allows them to manage this efficiently it should save them both time and money while giving them greater insights and overviews of their rental businesses finances.
Another benefit is that when an ‘update’ is submitted, HMRC will be able to calculate the taxpayer’s potential tax bill as close to ‘real time’ as possible, meaning you will have live updates of your total end of year tax bill via an online digital account similar to how accounts are viewed on a bank screen online making it far easier to prepare. These features aim to help taxpayers pay the correct amount of tax, putting a stop to under and overpayments.
Digital Record Keeping with Landlord Studio
This move to digitisation is a great opportunity to look for a solution that not only allows you to submit updates as required but will actually help you streamline your rental property management. As such there are a few key features you should look for in the solution that you eventually choose. These include:
Real-Time Income And Expense Tracking
To ensure you are sending accurate updates, you will want to adopt a system that allows you to track your income and expenses on the go. Ideally, then you are looking for cloud software with an easy to use native app as well as desktop software. This will also allow you to avoid the big end of quarter admin task.
You should find software that allows you to easily digitise your receipts using your phone camera so that you can snap a picture and attach it to your recorded expenses for future reference. Although there will be no requirement to submit actual invoices or receipts, this backup information must still be kept.
Leverage Open Banking Innovations
The best solutions will allow you to link your bank account(s) and reconcile income and expenses from inside the software. This removes the need for time-consuming and error-prone manual data entry.
Automate Time-Consuming Tasks
Set and forget routine tasks such as regular tenant communications, reminders and recurring expenses to improve the efficiency of your rental portfolio management.
The first year will not be too strictly regulated as some teething issues are expected whilst people move onto the new system. However, the new rules will be fully operational at that time and HMRC will be within their rights to apply penalties for late-payments and submissions. This is why it’s a good idea to start looking for digital income and expense tracking solutions like Landlord Studio sooner rather than later so that you can become familiar with the tools available and stay MTD compliant.
Landlord Studio is just one cloud-based solution for property management and accounting that will allow you to manage your tenancies, track income and expenses in digital form, digitise receipts, and more through either the mobile app or desktop portal.
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