Making Tax Digital (MTD) was first announced by the government in 2015 as an initiative to improve the effectiveness and efficiency of the UK tax system, with a view to migrate the current tax system to a fully digitised online tax system by the end of 2020.
Millions of businesses are already banking, paying bills and using accounting software, and HMRC’s ambition is that digital records will avoid transposition errors and mistakes which cost the Exchequer over £9 billion a year.
MTD will mean that landlords & residential management companies will need to keep their accounting records in MTD-compatible software. Paper records and spreadsheets alone will no longer meet HMRC requirements.
Will making tax digital apply to me and when does making tax digital begin?
Essentially, MTD will require businesses to keep their VAT records digitally and submit their VAT returns and other additional information using third party software.
Businesses that are VAT registered with a turnover above the £85,000 VAT threshold must send returns using MTD compatible software from April 1st 2019. Businesses registered for VAT with turnover below the threshold are exempted, however they can opt in voluntarily.
This will impact dramatically on landlords & residential management companies who are registered for VAT. There is a six-month delay for certain VAT registered businesses (e.g. VAT groups, unincorporated ‘not for profit’ organisations, trusts etc.).
If you are in receipt of income annually greater than £10,000 then it will apply to you from April 2020, so it is essential to prepare for it now.
What digital records are needed?
Landlords & residential management companies will need to keep the following information as digital records which will need to be preserved for up to six years:
- Business name, principle place of business and VAT registration number (to also include the VAT accounting scheme used by the business)
- The VAT account showing the audit trail between primary records and the VAT return
- Details about supplies made and received
Businesses will need to submit their VAT returns using compatible software, which will pull information from the digital records.
If businesses need to make amendments to their VAT return, the existing error correction rules will apply.
The software you use must be able to do the following:
- Keep records in a digital form
- Preserve digital records in a digital form
- Create a VAT return from the digital records
- Provide HMRC with VAT data on a voluntary basis
- Receive information from HMRC via the API (application programme interfaces) platform. This will allow HMRC to send ‘nudges’ to the business/agent
What are the penalties?
While everyone gets to grips with the new system there are unlikely to be no late filing penalties for at least a year. After that you will suffer penalties if you file your returns late and the accountancy profession expects a points-based system where penalties are built up for late returns and payments.
Where there are multiple properties
Where landlords hold multiple properties within a property business, income and expenditure only has to be recorded for the property business as a whole, however there is a requirement to maintain details of each property’s address in the digital records.
What is an end of year declaration and how do I make it?
As well as the quarterly updates of income and expenses, landlords & residential management companies will be required to make an end of year declaration that everything is complete and correct. You will have until 31 January following the tax year to complete this end of year declaration (as it is currently).
This is useful as many property businesses will need to adjust information submitted, for example reconsidering which expenses are allowable or disallowable against profit.
What about properties owned by a partnership or jointly?
The principles of the proposed system for partners and partnerships are as follows:
- The partnership, rather than each partner, will be responsible for the central requirements of making tax digital (keeping a record of each transaction, providing quarterly summary updates and end of year information)
- A nominated partner will fulfil these obligations
- There will be an option for the nominated partner to push quarterly summary information of their share of the profit to each partner’s digital tax account. Each partner under this option would therefore have an estimate of their profit to date in the tax year
- When the end of year declaration is made, the nominated partner will be obliged to push each partner’s share of profits to their digital tax accounts
The above rules applying to partnerships would not apply to property that is jointly held. In this situation each individual who received income from jointly held property would report that income separately.
MTD for Income Tax
MTD for income tax is scheduled to be rolled out in April 2020 and will first cover all unincorporated businesses and landlords with turnover in excess of £10,000 per year. It will cover the first trading period starting after 5 April 2020.
Businesses and landlords who join MTD for Income Tax will need to send quarterly summaries of their income and expenses to HMRC using MTD-compatible software. In response they will receive an estimated tax calculation based on the information provided to help them budget for their tax.
Initially, no tax will be calculated on the quarterly updates, rather this will be done when the year-end accounts are prepared, and a year-end submission is submitted. The deadline for making Income Tax payments is not changing.
HMRC are building functionality so that businesses and landlords will eventually be able to send information about all types of income, using software, not just their business/rental income, including things like employment income, bank and building society interest, dividends, gift aid etc.
You do not need to keep any additional business records because of MTD. However, business records must be kept digitally to be compliant. If you use spreadsheets, the spreadsheets must be able to submit the required data to HMRC digitally, for example, by using MTD-compatible bridging software.
Morton Baxter are specialists in residential management accountancy and can assist you with all aspects of your financial reporting. Our experienced team will ensure your accounts are filed correctly, on time and meet best practice guidelines. Find out more about how we can help by calling 01565 655331.