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MTD ITSA: Answers for landlords

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The MTD ITSA guidance has provided some answers for landlords, but there are still significant areas of uncertainty. Rebecca Cave summarises the known knowns and the known unknowns.

2nd Sep 2022
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A recent AccountingWEB MTD Bootcamp session on Making Tax Digital for sole traders and landlords highlighted several viewer questions that required further investigation. We put them to HMRC, along with a few additional queries, to help fill in a few MTD-based blanks for accountants with landlord clients.  

Turnover threshold

Many tax advisers are questioning the entry threshold for MTD ITSA reporting, which currently stands at qualifying income exceeding £10,000 per year. HMRC cemented its position on this in its new guidance on what is included in qualifying income.

During the MTD Bootcamp session, a viewer asked: “A client has self-employed income of over £10,000 and also owns a rental property jointly with her husband (who is employed). Does the rental income have to be on MTD?”

HMRC answered: “The client’s share of the rental income and expenses does have to be reported under MTD ITSA, as that client has qualifying income in excess of £10,000. The husband’s qualifying income is comprised of his rental income alone as he is not also self-employed, so the husband only has to comply with MTD ITSA if his share of the gross rental income is over £10,000 per year.

“The client has to report their share of the rental income quarterly under MTD ITSA irrespective of the amount, as they already have to make separate quarterly reports under MTD for their trading income which exceeds £10,000.”

Husband and wife owners

A listener asked: “For husband and wife landlords, can one digital record be kept or will they need to keep separate records.”

HMRC doesn’t yet have a definite answer on this as it replied: “In practice, we expect that it will be possible for these customers to maintain joint digital records and meet other MTD obligations through their shared software. We are working with external partners on this issue and will set out further guidance on MTD requirements for joint property owners in the coming months.”

Jointly held property

ICAEW has listed the design of obligations for landlords of jointly held property as one of their key concerns about the implementation of MTD ITSA. In particular, ICAEW wants to know how income from different property portfolios will be aggregated prior to submission to HMRC. There is no apparent software solution to this problem yet.

Jointly held property is a very common situation. Within families, different members will often own varying percentages of the properties in the family portfolio.

HMRC was also asked: “How do you deal with a client who has interests in several properties under different ownerships which are each dealt with by different accountants or bookkeepers.”

The HMRC reply does not inspire confidence: “Currently only one agent can access a customer’s MTD account. We are working with developers and stakeholders to understand the user need for multiple agent access to the MTD system.”

Accruals or cash accounting

Landlords can choose whether to draw up their property accounts on a cash or accruals basis, with the cash basis being the default if their gross income is not more than £150,000 per year. Where the gross amount received in the year exceeds £150,000, the landlord must not use the cash basis but must use the GAAP basis of accruals accounting.

An AccountingWEB reader asked: “For landlords reporting on an accruals basis, do they still have to report quarterly on a cash/receipts basis?”

HMRC replied: “Customers should choose at the beginning of a tax year whether they are using the accruals or cash basis for their record-keeping. They will then submit their quarterly updates and end of period statement in line with their record keeping.”

This answer does not solve the dilemma for the landlord, who will not know whether they have to use the cash basis or the accruals basis until the year is complete, as the decision is based on the total gross property income for the year.

Furnished holiday lettings

A similar problem arises with furnished holiday lettings (FHL). The landlord won’t know whether the property qualifies as FHL for the year until it has been let for at least 105 days and been available for holiday letting for at least 210 days in that same year.  In some cases, the grace period or averaging elections will apply but those adjustments can’t be invoked until the tax year is complete.

We asked how a landlord will know at the end of a quarter whether the property will qualify as FHL and thus be subject to different accounting rules.

HMRC provided this answer: “MTD ITSA will mean that customers move closer to a system of real-time reporting which will have various benefits for them and HMRC. However, this means that some decisions previously made after the year-end will need to be made at the beginning of a tax year. If a customer later finds that they do not meet certain requirements, for example, a property failing to qualify as an FHL, then they will be able to adjust their digital records accordingly by removing disallowable expenses etc.”

Lack of NI number

Not all landlords have a national insurance number, especially if the individual is resident outside of the UK or was born overseas. Currently, both the taxpayer’s NI number and UTR number are required in order to sign-up to MTD ITSA.

We asked HMRC: “How will landlords who do not have an NI number report under MTD ITSA?

HMRC replied: “We are continuing to explore options around the identity verification of those customers that do not have a national insurance number. Further details will be set out in due course.”

Non-resident landlords

Non-resident companies are automatically exempt from MTD ITSA but non-resident individuals are within MTD in respect of their UK property. AccountingWEB asked HMRC how non-resident landlords should report their non-residence status at the end of the year.

HMRC replied: “We are aware of this issue and are working through how changes of residence and domicile will affect MTD obligations and be processed through the system.”

More guidance to come

With 19 months to go before MTD ITSA goes live, there are clearly a number of issues which need to be thought through and designed into the system. More guidance is expected in the coming months, and we will let you know when these known unknowns are resolved

Replies (78)

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By Beef curtains
02nd Sep 2022 16:06

As usual/fully expected, the Blob is making it up as it's going along. MTD is benefit free, work creating nonsense in any event but to do it at the same time as changes to basis periods and an economic crisis is the sort of unbridled insanity that is the hallmark of the zealots at the Revenue.

Thanks (28)
Replying to Beef curtains:
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By farrcorfe
05th Sep 2022 09:35

Absolutely correct. The sooner we wake up to the fact that we live in a totalitarian state the easier it will be for us to accept that we are powerless in the face of the bureaucratic morons at HMRC and other government departments. As well as MTD - Making Tax Difficult- perhaps the OTS should read Office of Tax Stupidity.

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Tornado
By Tornado
02nd Sep 2022 16:26

Thanks once again Rebecca. You are on fire at the moment.

I cannot find any further words to describe how unbelievably chaotic this project is. It seems obvious to me that the many problems still to be resolved will be impossible to resolve and HMRC really have no right to expect people to even attempt to comply with this pointless rubbish. (And of course, I think hundreds of thousands [perhaps millions] will not even attempt to comply).

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Replying to Tornado:
By ireallyshouldknowthisbut
02nd Sep 2022 17:06

I am rather enjoying the style of these articles.

Dismantling of the whole project, fact by fact.

And we haven't really gotten into the real detail of any of this yet, we are still skirting around the edges of it.

O and as for the new tax return.....................they are going to build that in a few months of course between April 2024 and April 2025 when it goes in.......

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Replying to ireallyshouldknowthisbut:
ghm
By TaxTeddy
04th Sep 2022 11:14

I just wonder whether the time has come for tax professionals to abandon this project. Certainly, it's laudable for people like Rebecca to be highlighting all the problems which are inherent in the system but would we be better off just not bothering? Leave HMRC to it and let the shambles unfold in April 2024.

I for one would be completely happy to file meaningless and inaccurate crap each quarter. And the clients certainly wouldn't care because it doesn't affect their tax liability - it's a pointless exercise.

A harsh view perhaps but as others have pointed out, HMRC are just not listening so why are we bothering to discuss it?

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By Paul Crowley
02nd Sep 2022 16:39

'Husband and wife owners
A listener asked: “For husband and wife landlords, can one digital record be kept or will they need to keep separate records.”

HMRC doesn’t yet have a definite answer on this as it replied: “In practice, we expect that it will be possible for these customers to maintain joint digital records and meet other MTD obligations through their shared software. We are working with external partners on this issue and will set out further guidance on MTD requirements for joint property owners in the coming months.” '

Such a basic starter question and HMRC have absolutely no idea how MTD ITSA will work in practice
Heads in the clouds and never dealt with a real client or a real accountant that deals with really small clients

The big four have no problem with MTD ITSA because they will have so few needing to engage, and the few will all be exceedingly rich
As ICAEW is operated by the big four, ICAEW also see no problems.

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By Paul Crowley
02nd Sep 2022 16:47

Much appreciated
Every HMRC answer is 'we did not think of that so did not design for that' and probably means they will ask the software developers (rather than accountants) for an opinion that HMRC will trot out 10 minutes before kicking it down the road again

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Replying to Paul Crowley:
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By NotAnAccountant2
02nd Sep 2022 19:20

Paul Crowley wrote:

Much appreciated
Every HMRC answer is 'we did not think of that so did not design for that' and probably means they will ask the software developers (rather than accountants) for an opinion that HMRC will trot out 10 minutes before kicking it down the road again

Absolutely right on asking the software developers. I've now got an invite to discuss how to do basis reform!

I know enough to know that I don't have a clue and anything I try to design won't work even in simple cases.

I've had some fun trying to guess how HMRC might predict tax based on tax-year quarters but I'm not convinced there's a solution unless you have very reliable income. (and I might have completely misunderstood how it will work where accounting year and tax year don't align).

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By Hugo Fair
02nd Sep 2022 17:16

Who writes the sub-titles (the bit above the picture)? Not Rebecca I guess.

".. summarises the known knowns and the known unknowns" isn't even true.
There are no 'known knowns' listed - just "We expect .." / "We are working .." / "We are continuing to explore .." / "We are aware .." responses from HMRC (aka 'Ooh good point/ not sure really').

And the one item (under Turnover Threshold) that is clear, contains a misleading response from HMRC:
“The client has to report their share of the rental income quarterly under MTD ITSA irrespective of the amount, as they already have to make separate quarterly reports under MTD for their trading income which exceeds £10,000.”
That's true up to where the comma appears - but the reason they have to submit QUs is NOT because their trading income exceeds £10,000 (but because their combined trading + rental income exceeds £10k).
HMRC's response suggests that trading income of £9.9k + rental income of £9.9k does not require MTD reporting?!?

Thanks (7)
Replying to Hugo Fair:
Tornado
By Tornado
02nd Sep 2022 17:20

The most baffling aspect of this whole MTD project is that we already have a perfectly good Tax Administration System (Self-Assessment) that after 25 years of fine tuning, deals very well with just about all the problems that are being thrown up by the MTD project.

What is the point of MTD for ITSA?

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Replying to Tornado:
By ireallyshouldknowthisbut
02nd Sep 2022 17:44

@Tornado apparently there are benefits for taxpayers and HMRC.

We just don't know what those might be.

Cost/benefit analysis seems so 1990, its all about dogma and belief now. And ignoring experts.

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Replying to Tornado:
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By Beef curtains
05th Sep 2022 10:43

The Revenue's mantra, in recent times, has been and remains "if it ain't broke, fix it!"

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Replying to Beef curtains:
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By RobertD
06th Sep 2022 07:50

Beef curtains wrote:

The Revenue's mantra, in recent times, has been and remains "if it ain't broke, fix it!"

Or, “if it ain’t broke, mess about with it ‘till it is”

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By David Ex
02nd Sep 2022 18:00

You have to laugh:

‘HMRC provided this answer: “MTD ITSA will mean that customers move closer to a system of real-time reporting which will have various benefits for them and HMRC. “‘

Funny they can claim benefits while not being able to give credible examples!

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Replying to David Ex:
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By Hugo Fair
02nd Sep 2022 18:34

Is 'various' not sufficiently quantified for you then? :=)

I've certainly seen taxpayer 'records' where they believe an answer of 'various' (to questions like 'any other income in the year?') to be entirely adequate ... an opinion not shared by HMRC for some reason!

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Replying to David Ex:
boxfile
By spilly
03rd Sep 2022 10:16

I’d like HMRC to move towards a more ‘real-time’ system themselves first. Such as answering the phone within 5 minutes, responding to letters within 10 days, etc.
That really would have benefits for everyone, unlike this absolute mess of MTD.

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Replying to spilly:
By SteveHa
05th Sep 2022 11:31

spilly wrote:

I’d like HMRC to move towards a more ‘real-time’ system themselves first. Such as answering the phone within 5 minutes

Back in my days in HMRC the target was within 5 rings, not minutes.

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Replying to SteveHa:
Morph
By kevinringer
05th Sep 2022 12:17

Our local tax office used to answer within 1 ring. Even the ADL used to be within 1 ring once upon a time. Last week, one call I was on hold for 1 hour 20 minutes. HMRC are getting so slow, we'll soon be measuring this in days, not minutes or rings. I am waiting for answers to letters sent 2021. I've only just had a 2021 Tax Return that was filed in November 2021 captured: and that was only after phoning the ADL 5 times over the last 10 months.

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Replying to kevinringer:
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By NotAnAccountant2
05th Sep 2022 12:19

kevinringer wrote:

Our local tax office used to answer within 1 ring. Even the ADL used to be within 1 ring once upon a time. Last week, one call I was on hold for 1 hour 20 minutes. HMRC are getting so slow, we'll soon be measuring this in days, not minutes or rings. I am waiting for answers to letters sent 2021. I've only just had a 2021 Tax Return that was filed in November 2021 captured: and that was only after phoning the ADL 5 times over the last 10 months.

I recall a study that suggested 3-5 rings is the optimal time. 1 ring is actually too quick and the caller isn't yet ready to talk to the person (although that was back in the days of actually dialing numbers - maybe with smartphones where it's on click to call that result is no longer valid)

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Replying to kevinringer:
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By Carol Jefferis
06th Sep 2022 09:56

Our local parish council is still waiting for a response to a VAT claim sent in March 2020.
Chased it July 2022, still nothing.

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By GHarr497688
02nd Sep 2022 19:18

This is just crazy and will cost a fortune in software fee's as the software houses will want their pound of flesh. Many older people have never used a spreadsheet or software . All they have is rental income of say £12000 a year and that's it. A quick easy job on HMRC's portal will have gone from being simple and straightforward to a complex process of recording one transaction a month on a platform that is bound to costs and then make multiple filings that are no benefit to anyone. What is wrong with these people at HMRC. For a larger business it will be much worse. Me and all my staff are retiring in 2023 is this doesn't stop now.

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By NotAnAccountant2
02nd Sep 2022 19:48

If you have fully relieved rental income then do you have to include it in MTD?

What about if you discover it's just gone over?

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Replying to NotAnAccountant2:
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By NotAnAccountant2
03rd Sep 2022 08:36

Now I've had time to sleep on it, it gets both worse and better:

Quote:

HMRC replied: “Customers should choose at the beginning of a tax year whether they are using the accruals or cash basis for their record-keeping. They will then submit their quarterly updates and end of period statement in line with their record keeping.”

(This is what I assumed would be the case back in 2017 when I first heard about MTD for landlords but I know others felt differently and it would be cash accounting for the quarters regardless)

So, for a fully managed let property, accounted on an accruals basis, let on a 12 month AST, with the exception of any unanticipated maintenance expenses and any bad debt, there is almost nothing to do for MTD other than wait for the magic dates to roll around so you can submit the data which you already knew.

So that might actually make it easier for accountants - all you need to know is when the tenancy renews and chase for a copy of the new AST once it renews or a new tenant moves in and then most of the accounting entries for the remainder of the year (and the start of the next year) can be entered.
(second date might be renewal of the buildings insurance and/or service charges)

It might also make it easier for jointly managed properties - the ongoing transactions can be circulated amongst the owners once per year when the tenancy renews, and then all that is needed is to circulate the end of year adjustment transactions for each owner to enter.

Each person enters their own set of transactions - so there's no problem about "digital links" because - although it's all one property, one agent, one set of transactions, there's no connection between the MTD data for the different owners.

The "unanticipated expenses", such as fixing a leaking tap, can presumably be accounted for in the EoY adjustments - and most likely if there's going to be significant maintenance work, that will happen between tenancies.

But now I'm thinking of the person with MTD property income who has a trivial side hustle - they've never needed to include it in a tax return, only making about 700p.a. turnover. But one year it ticks over to 1010p.a. and now they've got (at least) three late quarters (easter seasonal ebay business with a late easter at the start of the tax year and early easter at the end could cause this)

Thanks (2)
Replying to NotAnAccountant2:
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By Hugo Fair
03rd Sep 2022 11:22

NotAnAccountant2 wrote:

The "unanticipated expenses", such as fixing a leaking tap, can presumably be accounted for in the EoY adjustments ...

Sorry, but I thought this 'new guidance' said that any correction or missing data had to be recorded digitally 'as soon as known' AND should result (where this is consequently necessary) in a revised QU being immediately submitted ... NOT waiting for Y-E?

I'd be delighted to be assured that I've misunderstood that aspect ... but have I?

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Replying to Hugo Fair:
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By NotAnAccountant2
03rd Sep 2022 23:45

Hugo Fair wrote:

NotAnAccountant2 wrote:

The "unanticipated expenses", such as fixing a leaking tap, can presumably be accounted for in the EoY adjustments ...

Sorry, but I thought this 'new guidance' said that any correction or missing data had to be recorded digitally 'as soon as known' AND should result (where this is consequently necessary) in a revised QU being immediately submitted ... NOT waiting for Y-E?

I'd be delighted to be assured that I've misunderstood that aspect ... but have I?

You (deliberately) don't get any statements from the agents until year end. So you don't know until then :-)

Depending on exactly what the legislation says you might need to resubmit the four quarters when you do the EOPS and finalize the return.

I also wonder where income goes where there's no business setup yet. Taxpayer already in MTD and sets up as a plumber in March and make 2k turnover. How do they enter their new income? (in the sandbox it's easy, there's a create self employment api but I think that's test only)

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Replying to NotAnAccountant2:
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By Hugo Fair
04th Sep 2022 13:16

"You (deliberately) don't get any statements from the agents until year end. So you don't know until then :-)"

... is exactly what went through my mind as to how many people will react - and therefore the most likely (unintended) consequence of this idiocy!

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By adam.arca
03rd Sep 2022 07:45

There’s a danger, for quite some time now, that accountants’ Pavlovian response to MTD is “utter rubbish.” But is it any wonder when HMRC drop, erm, utter rubbish like this seemingly out of the ether, without consultation and without consideration for the mugs (taxpayers and their agents) who will have to make it work?

These “answers” aren’t answers at all, they’re deflections and we’re all being treated with contempt.

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By richard thomas
03rd Sep 2022 18:12

I agree entirely with Hugo (at 17.16 yesterday that we have no answers to anything except where the answer is to tell us what the legislation says about “qualifying income”. I don’t share Hugo’s view that the answer there was misleading: it was correct in the context of the question. It was the only one, though, that was correct. That reminded me of Evelyn Waugh’s remark when he was told that Randolph Churchill had been taken to hospital but that they had removed a tumour which was not malignant. “How clever of modern medical science to open Randolph up and remove the only bit of him that was not malignant”

This issue is of particular relevance to me as I am the owner of an EEA property business which qualifies as FHL, though for 20-21 and 21-22 only by virtue of the periods of grace. Like many other owners of properties in other countries, whether FHL or not, I rely on local agents to keep the records for the lettings and maintenance of my house and the payment of local taxes fees etc and even the iniquitous Spanish income tax on non-EU/EEA landlords, except for the electricity bills which I pay by direct debit to the electricity company. They have a client account for me which I can view on their website. It is very clunky and I haven’t worked out a way of even importing it into Excel.

At present I copy the items into a spreadsheet under different headings (along with the leccy bills and bank changes) to create accounts of sort and to make computational adjustments. I propose to go on doing that until HMRC contact me to tell me what I have to do if it’s not alright. Will this do for MTD?

With that preamble I can turn to Rebecca’s yet again excellent post, and offer my comments on some of the questions and “answers”.

Accruals or cash accounting

There seems to me to be a lot of muddled thinking here. My non-credentials on this are that I know nothing about bookkeeping (I last did it at a training centre in the Inland Revenue in 1971). My credentials are that I was policy and technical lead for the legislation that adapted UK tax law for International Accounting Standards and legislation that reformed the loan relationships legislation and invented the derivative contracts legislation. In the course of that I was responsible for what became s 25 ITTOIA.

The reference to “cash basis” here is obviously to s 271A ITTOIA, the property equivalent of s 25 for trades. The profits of a property business (ie all the UK and all the overseas businesses carried on) must be *returned* on a GAAP basis if the business is not carried on by an individual acting as such; the cash basis receipts for the year are more than £150,000; the other live-in spouse or civil partner’s share of joint property income is returned on a GAAP basis or an election for GAAP is made. Otherwise the profits are to be returned on the cash basis.

But this is a rule that applies to the way profits are calculated for tax purposes. It is perfectly acceptable for records to be kept on a cash basis which amount to accounts and then adjustments made to cater for accruals, prepayments, stock, etc. It is perfectly acceptable for a company to draw up accounts on a non-GAAP compliant basis and make adjustments to make the result comply with GAAP – see eg s 309 CTA 2009. It doesn’t even have to draw up accounts at all – see s 309(1)(b).

The only law on record keeping is the moribund s 12B TMA. The general rule is that a person must:

“keep all such records as may be requisite for the purpose of enabling him to make and deliver a correct and complete return for the year or period”.

For trades, professions and businesses the records must include:

“all amounts received and expended in the course of the trade, profession or business and the matters in respect of which the receipts and expenditure take place, and

in the case of a trade involving dealing in goods, all sales and purchases of goods made in the course of the trade; ...”

There is no definition of “received” or “expended”.

Any requirement to keep records in a certain way must therefore be found in the MTD law. The definition of digital records is in regulation 6 of the Income Tax (Digital Requirements) Regulations 2021:

“(1) Subject to paragraph (3), “digital records” for a business means records of each of the transactions made in the course of the business, including—

(a) the amounts of the transactions;

(b) the dates of the transactions, according to the basis used by the relevant person for recording transactions for the purposes of income tax; and

(c) the categories of transactions into which the transactions fall, to the extent those categories are specified.”

As I have endeavoured to show above, there is no such basis as is mentioned in sub-paragraph (b). But if it is possible to keep records on an accruals basis (I don’t know) and you do, then you have to put the date which that basis would give as the date of the transaction. Obviously on a cash basis you would follow the banks account entries or the date when the £50 notes were handed over in a brown envelope.

Nothing stops you changing the recoding basis (not for income tax but for your own purposes) part way through a year if that would be better for you.

Thus if you keep your records on the cash basis you can still return the profits on an accruals basis by making appropriate adjustments at the end of the year (regulation 13(1)(e)).

The reported “answer” by HMRC:

“Customers should choose at the beginning of a tax year whether they are using the accruals or cash basis for their record-keeping. They will then submit their quarterly updates and end of period statement in line with their record keeping.”

Is total nonsense, and not supported by law.

The “dilemma” in the final paragraph of this section is not real (and anyway would only affect those at the margins of £150k receipts.

Furnished holiday lettings

It follows from the above that the period of grace (or averaging) election is only an end of year (or later – you have 12 months from the normal filing date to make the election) matter, and is applicable whether you se cash basis or not for reporting profits or for recording transactions.

In any case, what different accounting rules?

The HMRC answer is not only nonsense for the reasons given in relation to the previous section, but doubly nonsense in saying taxpayers will have to make “some decisions” (which ones?) at the start of the year and then saying if it turns out to be an FHL

“they will be able to adjust their digital records accordingly by removing disallowable expenses etc.”

But digital records are of transactions, the only reference to accounting or bookkeeping bases is to determine the date of the transaction, and the regulations clearly sate that adjustments are made in the OP statement. There is nothing in the regulations that says that you are only allowed to record allowable expenses (the implication of that stupid answer)!

Thanks (7)
Replying to richard thomas:
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By Malmsmead
05th Sep 2022 12:37

What a refreshing comment.
My only addition is that HMRC also have to decide when joint property ownership (of real estate) becomes a business partnership. If it does, MTD will not apply from April 2024, but 2025.

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Replying to Malmsmead:
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By raycad
07th Sep 2022 16:44

Replying to Richard Thomas's post at 18.12 on 3 September:

Richard - you were known as the scourge of HMRC when you were an FTT judge. Do you fancy reprising that role by leading a People's (and Accountants) rebellion against MTD? You could be to the anti-MTD lobby what Boris was to the EU. Not talking about super-gluing ourselves to Somerset House or paint-bombing it. (Oh, I don't know, though!)

Seriously, why doesn't HMRC seek to engage with someone like yourself who both has the legislative grasp AND the practical experience of being a property owner? Or are they still not speaking to you after you called out their inadequacies in several FTT decisions?

I have numerous clients who own rental properties, invariably jointly-owned, some Uk-resident, some not. Property portfolios range from one to over twenty. One client in the latter category lets through FOUR different lettings agents with each of them presenting the figures in their own chosen style.

In previous years I have taken it upon myself to try to obtain copies of the quarterly or monthly rental statements (not all agents are willing to accommodate me!) and from these create my own Year-to-date spreadsheet.
This then turns into the "raw" yearly rental accounts at Month 12. Then I have to adjust for non-allowables and in most cases work out the interest "tax credit" and slot all the figures into the SA returns. But, if I have read the MTD guidance (such as it is) correctly, then none of this will be good enough for MTD for ITSA. I simply despair.

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Replying to richard thomas:
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By Malmsmead
05th Sep 2022 12:37

What a refreshing comment.
My only addition is that HMRC also have to decide when joint property ownership (of real estate) becomes a business partnership. If it does, MTD will not apply from April 2024, but 2025.

Thanks (1)
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By kaff
03rd Sep 2022 18:57

It would have been such a good idea if the MTD designers had actually read Part 3 ITTOIA before they started designing their hugely flawed system. We seem to have a tax authority which is completely ignorant of tax law. Don’t their IT people actually talk to their tax policy people? - seems not or they'd have understood years ago that it’s nonsense to ask people to make a quarterly return based on a requirement that can’t legally be ascertained until after the end of the year. Surely that’s just going to end up with more people claiming a beneficial treatment they’re not entitled to, and not bothering to change it later?

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By Calculatorboy
03rd Sep 2022 19:52

Welcome to the Chaos.

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By richard thomas
03rd Sep 2022 20:45

Apologies if this appears again, but my previous effort at posting seemed to go into a void.

I agree entirely with Hugo (at 17.16 yesterday that we have no answers to anything except where the answer is to tell us what the legislation says about “qualifying income”. I don’t share Hugo’s view that the answer there was misleading: it was correct in the context of the question. It was the only one, though, that was correct. That reminded me of Evelyn Waugh’s remark when he was told that Randolph Churchill had been taken to hospital but that they had removed a tumour which was not malignant. “How clever of modern medical science to open Randolph up and remove the only bit of him that was not malignant”

This issue is of particular relevance to me as I am the owner of an EEA property business which qualifies as FHL, though for 20-21 and 21-22 only by virtue of the periods of grace. Like many other owners of properties in other countries, whether FHL or not, I rely on local agents to keep the records for the lettings and maintenance of my house and the payment of local taxes fees etc and even the iniquitous Spanish income tax on non-EU/EEA landlords, except for the electricity bills which I pay by direct debit to the electricity company. They have a client account for me which I can view on their website. It is very clunky and I haven’t worked out a way of even importing it into Excel.

At present I copy the items into a spreadsheet under different headings (along with the leccy bills and bank changes) to create accounts of sort and to make computational adjustments. I propose to go on doing that until HMRC contact me to tell me what I have to do if it’s not alright. Will this do for MTD?

With that preamble I can turn to Rebecca’s yet again excellent post, and offer my comments on some of the questions and “answers”.

Accruals or cash accounting

There seems to me to be a lot of muddled thinking here. My non-credentials on this are that I know nothing about bookkeeping (I last did it at a training centre in the Inland Revenue in 1971). My credentials are that I was policy and technical lead for the legislation that adapted UK tax law for International Accounting Standards and legislation that reformed the loan relationships legislation and invented the derivative contracts legislation. In the course of that I was responsible for what became s 25 ITTOIA.

The reference to “cash basis” here is obviously to s 271A ITTOIA, the property equivalent of s 25 for trades. The profits of a property business (ie all the UK and all the overseas businesses carried on) must be *returned* on a GAAP basis if the business is not carried on by an individual acting as such; the cash basis receipts for the year are more than £150,000; the other live-in spouse or civil partner’s share of joint property income is returned on a GAAP basis or an election for GAAP is made. Otherwise the profits are to be returned on the cash basis.

But this is a rule that applies to the way profits are calculated for tax purposes. It is perfectly acceptable for records to be kept on a cash basis which amount to accounts and then adjustments made to cater for accruals, prepayments, stock, etc. It is perfectly acceptable for a company to draw up accounts on a non-GAAP compliant basis and make adjustments to make the result comply with GAAP – see eg s 309 CTA 2009. It doesn’t even have to draw up accounts at all – see s 309(1)(b).

The only law on record keeping is the moribund s 12B TMA. The general rule is that a person must:

“keep all such records as may be requisite for the purpose of enabling him to make and deliver a correct and complete return for the year or period”.

For trades, professions and businesses the records must include:

“all amounts received and expended in the course of the trade, profession or business and the matters in respect of which the receipts and expenditure take place, and

in the case of a trade involving dealing in goods, all sales and purchases of goods made in the course of the trade; ...”

There is no definition of “received” or “expended”.

Any requirement to keep records in a certain way must therefore be found in the MTD law. The definition of digital records is in regulation 6 of the Income Tax (Digital Requirements) Regulations 2021:

“(1) Subject to paragraph (3), “digital records” for a business means records of each of the transactions made in the course of the business, including—

(a) the amounts of the transactions;

(b) the dates of the transactions, according to the basis used by the relevant person for recording transactions for the purposes of income tax; and

(c) the categories of transactions into which the transactions fall, to the extent those categories are specified.”

As I have endeavoured to show above, there is no such basis as is mentioned in sub-paragraph (b). But if it is possible to keep records on an accruals basis (I don’t know) and you do, then you have to put the date which that basis would give as the date of the transaction. Obviously on a cash basis you would follow the banks account entries or the date when the £50 notes were handed over in a brown envelope.

Nothing stops you changing the recoding basis (not for income tax but for your own purposes) part way through a year if that would be better for you.

Thus if you keep your records on the cash basis you can still return the profits on an accruals basis by making appropriate adjustments at the end of the year (regulation 13(1)(e)).

The reported “answer” by HMRC:

“Customers should choose at the beginning of a tax year whether they are using the accruals or cash basis for their record-keeping. They will then submit their quarterly updates and end of period statement in line with their record keeping.”

Is total nonsense, and not supported by law.

The “dilemma” in the final paragraph of this section is not real (and anyway would only affect those at the margins of £150k receipts.

Furnished holiday lettings

It follows from the above that the period of grace (or averaging) election is only an end of year (or later – you have 12 months from the normal filing date to make the election) matter, and is applicable whether you se cash basis or not for reporting profits or for recording transactions.

In any case, what different accounting rules?

The HMRC answer is not only nonsense for the reasons given in relation to the previous section, but doubly nonsense in saying taxpayers will have to make “some decisions” (which ones?) at the start of the year and then saying if it turns out to be an FHL

“they will be able to adjust their digital records accordingly by removing disallowable expenses etc.”

But digital records are of transactions, the only reference to accounting or bookkeeping bases is to determine the date of the transaction, and the regulations clearly sate that adjustments are made in the OP statement. There is nothing in the regulations that says that you are only allowed to record allowable expenses (the implication of that stupid answer)!

Thanks (3)
Replying to richard thomas:
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By Carol Jefferis
04th Sep 2022 10:43

I think, (and others may have a different view) that the difference between 'keeping records' on a cash basis or accruals basis largely depends on whether one is running a purchase ledger and sales ledger in conjunction with the general ledger. In many small businesses the general ledger is little more than an analysed cash book and modern small business accounts packages reflect this in that they sell themselves on the benefits of using a bank feed as the method of prime entry.
A step closer to full accruals record keeping is where sales invoices are raised on the accounts package so a de facto sales ledger is created and this too is common but I don't recall ever seeing a small business (below VAT threshold) that ran a purchase ledger and I've been in practice for many decades.
Preparing accounts on an accruals basis is a different matter as that can involve period end adjustments for accruals and prepayments many of which would be reversed out at the beginning of the next accounting period.

Thanks (2)
Replying to Carol Jefferis:
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By Jo Nokes
04th Sep 2022 20:31

You are quite right about the smaller trader not processing purchase invoices, but relying on the bank feed for cost of sales and expense items. But even if the sales invoices are not processed, as the accountant, it's easy enough to add the outstanding items as part of the accounts production, and arrive at an accruals based set. I expect that some clients will be able to provide me with an excel spreadsheet, having themselves clicked to file the QUs. Normally, I would take the spreadsheets and process these via VT and then with one click, load this into VT accounts production (the Excel add in). I am puzzled as to how this process fits in with no manual intervention, but digital links only. As far as I know, this is yet to be explained, but is a vital part of my procedures

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By richard thomas
04th Sep 2022 12:54

Having had a during-the-night thought I should add something to what I said about FHLs

FHLs are simply a species of UK or overseas property business where there are a few different rules for deductions, most obviously the ability to claim finance costs fully as a deduction and claim CAs (or capex for cash basis taxpayers) for items used in residential property (and consequentially an inability to claim under s 311A ITTOIA for replacements, so that in fact is only an advantage for new purchases).

Schedule A1 TMA and the regulations in SI 2011/1076 do not make any distinction carving out FHLs from the two property businesses that may be carried on. In fact they don’t make any obvious distinction between UK and overseas property businesses.

Schedule A1 (Digital record keeping and reporting) primarily contains the vires for the regulations, circumscribing what the regulations may do.

Paragraph 1 Schedule A1 provides that the Schedule applies to:

“a person within the charge to income tax who, otherwise than in partnership, carries on (or has carried on)—

(a) a trade, profession or vocation the profits of which are chargeable to income tax under Part 2 of ITTOIA 2005,

(b) a property business the profits of which are chargeable to income tax under Part 3 of ITTOIA 2005, or

(c) any other activity which may give rise to profits or other income chargeable to income tax under Part 2 or 3 of ITTOIA 2005.*

*I’ll leave for another day what paragraph (c) refers to and how those activities within it get reported under MTD if at all.

Paragraph 7 says:

“(1) The Commissioners may by regulations require a person … to whom this Schedule applies to provide to HMRC, by electronic communications, specified information about **the business** of the person.”

Obviously, under the Interpretation Act 1978 (IA78) the singular includes the plural unless the context requires otherwise, which here it doesn’t, given that paragraph 6 defines “business”. It means:

“the activity by virtue of which this Schedule applies to the person (and if more than one, means each of them)”

What this means then is that the Commissioners may make regulations requiring specified information about both the activities of one or more trades carried on by a person, of one or more property businesses so carried on, or one or more other activities within paragraph 1(c). “Property business” is not defined in Schedule A1 or anywhere else in TMA that I can see, but since Part 3 ITTOIA does separately charge UK and overseas property businesses (each of which includes the income from all the properties falling into those categories) I think that paragraphs 1 and 6 do refer to each of those two property businesses.

The record-keeping requirements in paragraph 11 apply to “the business”, so by virtue of IA78 this means separate records for each property business (UK or overseas).

Turning to the regulations, the two property businesses distinction is specified by referring in regulation 2 on “interpretation” to s 263(6) ITTOIA (though in my view it would have been better to spell it out).

Interestingly the definition of “designatory information” in regulation 2 includes

“information which enables HMRC to identify … the type of business carried on by a relevant person, … or the basis used for calculating taxable profits for the purposes of income tax.”

This last entry reinforces my view, expressed in my post last night, that they can ask whether you are using the cash basis or the GAAP (accruals) basis for returning profits. That of course is something that cannot be known for certain until the return is made, because you may elect for cash basis for a trade for the year and all following years unless circumstances permit you to elect back for GAAP, and you may elect for GAAP basis for property businesses for each tax year. Elections do not have to be made until 12 months after the 31 January next following the end of the tax year. And as I said last night, these bases are nothing to do with how you keep your records.

Regulation 5 requires the keeping of digital records for “each business”, ie in the case of property, both the UK and the overseas property businesses, if applicable.

Regulation 7 requires a quarterly update “for a business” which in context must mean the same as in regulation 5.

Regulation 8 on update notices says they mean such notices as are made by the Commissioners requiring thew provision of information including:

“(a) providing designatory information;

(b) providing totals of the amounts falling within specified categories of transactions, being amounts derived from the relevant person’s digital records; and

(c) identifying the properties which form part of a property business.”

As noted designatory information includes whether the profits will be returned on the cash or GAAP basis. Of course the Commissioners could specify information about the basis on which you keep your records for each business, but I look below at whether they have sought to do that in the draft notice.

Paragraph 8(3) gives them the power to specify different designatory information for different descriptions of relevant person. But it is hard to think why they would not want that record keeping basis information generally.

I now turn to the draft notice so far as it purports to be for regulation 8.

It starts by saying that the information that must be provided is dependent on “the relevant person’s business or businesses” (IA 78 does not apply to notices which are not primary or secondary legislation).

My first reaction is: what is it about the businesses on which the information depends? It must be whether the businesses are trades etc, UK property businesses or overseas property business, because there are no others (ignoring again the paragraph 1(1)(c) Schedule A1 activities). And we have a list of the transactions that a person carrying on a trade must provide. I note that in common with HMRC guidance etc generally the descriptions make the false assumption that a business is a person, not an activity (“Businesses with trade profits” etc).

The next two lists are for UK property and overseas property, but they are qualified as not including FHL. EEA and UK FHL are listed separately. Oddly it says that UK property business must not include EEA FHLs! It also thinks FHL stand for “Furnished Holiday Let”: it doesn’t.

Given that there is no definition of FHL that refers to the legislation (“FHL” does not appear in ITTOIA), you are free to interpret it how you like. For example, it doesn’t have to be commercial, or to qualify for the treatments mentioned in s 322 ITTOIA by being let for so many days.

And if you look at the transactions listed, the only real difference for FHLs is that the notice refers to “loan interest and finance costs” rather than “residential and non-residential property finance costs”. All FHLs are residential property so why not just use the main property business tables? I suspect that HMRC want “residential property finance costs” so they can check that the restriction is applied when the EOP statement is made. But of course if your “turnover” is below the VAT threshold you don’t have to do more than a 3-line return anyway, which would not distinguish residential and non-residential property costs.

Regulation 8 allows the Commissioners to specify “categories of transactions” about the business (ie trade and UK and overseas property businesses). Regulation 8(3) gives them the power to specify different categories of transaction for different descriptions of relevant person.

What is the “description” of a person that allows this FHL information to be given. A person who may be in a position, at the end of the year, to qualify for certain different tax treatments, but who may not? It seems like more nonsense.

A final point on 3-line updates. The notice refers to “the VAT registration threshold” but doesn’t say which one (there are two – paragraph 1(1) and paragraph 1(3) Schedule 1 VATA 1994). Nor of course does it define “turnover” (nor does VATA) though s 474 Companies Act 2006 does:

“‘turnover”, in relation to a company, means the amounts derived from the provision of goods and services ..., after deduction of—

(a) trade discounts,

(b) value added tax, and

(c) any other taxes based on the amounts so derived;’

Does it mean that for MTD, and what does it mean for that purpose?

Thanks (3)
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By JD
05th Sep 2022 09:47

Thank you, Rebecca.

Thanks (1)
Morph
By kevinringer
05th Sep 2022 09:56

I can summarise Rebecca's excellent article:

Q1: Can couples maintain one digital record?
HMRC: Dunno

Q2: How will it work for joint owners with different agents?
HMRC: Dunno

Q3: How does it work for taxpayers who need to account from 6 April but don’t know what basis they qualify for until later in the year?
HMRC: Dunno

Q4: Hoes does it work for non-residents who don’t have a NINO?
HMRC: Dunno

HMRC should have decided on these before George Osbourne opened his mouth in 2015. The MTD ITSA pilot has been running since April 2017: that’s over 5 years ago. Surely HMRC and the software industry have had more than enough time to have figured this out. I know HMRC is a shambles and a disgrace, but even at their most chaotic, can they really be this unprepared and learned so little over the intervening years? After all, we have been asking HMRC all these questions since their 2016 consultation. What have HMRC been doing these last 6 years? HMRC have nothing to show for all those years and all those £millions of taxpayer funds. HMRC heads should roll. I know HMRC is a labyrinth of chaos, but Rebecca’s article has revealed that HMRC are even more incompetent than I could have imagined. When I started in practice, HMRC were respected, now they are a national embarrassment.

Thanks (19)
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By Homeworker
05th Sep 2022 10:10

How will I deal with a UK resident client who has property owned jointly with his sister in Republic of Ireland. Sister compiles information and Irish accountant prepares accounts, based on December year end of course. My client has no input but just receives the figures once a year, when he is told what tax he has to pay in Ireland (and how will we claim that back under MTD?).
I have asked him to find out if the Irish accountant would be willing to send him figures quarterly but that will no doubt cost him! It's further complicated by the Irish rules being quite different to ours, as there they claim interest as an expense and capital allowances on fixtures and fittings (I have to take these out and deal with them separately).

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Replying to Homeworker:
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By richard thomas
05th Sep 2022 10:19

In the situation what HMRC require quarterly are details of receipts and expenses as shown in the information compiled by the client's sister. For this the Irish and indeed the UK tax rules about finance costs and capital allowances are irrelevant - they will cause a problem however when it comes to the end of period statement, because as Rebecca's article shows, and as splendidly summed up by kevinringer, HMRC "dunno", so why should anyone else.

Thanks (1)
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By North East Accountant
05th Sep 2022 10:21

It does makes you wonder what on earth HMRC have been doing since 2016 to not have the answers to these key questions by now.

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Replying to North East Accountant:
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By Open all hours
05th Sep 2022 13:04

Exactly. In 2017 we met with HMRC along with a small number of other agents. One of them raised the matter of property syndicates. It was obvious that those representing HMRC were not aware of such entities. All these years later and HMRC have learned precisely nothing.

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Tornado
By Tornado
05th Sep 2022 10:49

Question to HMRC -

"Bearing in mind that the MTD project is unlikely to achieve most of its original aims, what exactly is the point of the project now?"

HMRC Reply -

"Dunno"

Question to HMRC -

"We already have an excellent Tax Administration System called Self-Assessment which is still going to continue indefinitely. What is the point of MTD if Self-Assessment can already handle everything very well as it is?"

HMRC Reply -

"Dunno"

Question to HMRC -

"MTD was justified as the End of The Tax Return. Clearly the Tax Return is going to continue indefinitely so the MTD project has failed already. What is the point of continuing with it?"

HMRC Reply -

"Dunno"

Question to HMRC -

"What day is it today?"

HMRC Reply -

"Dunno"

Thanks (13)
Replying to Tornado:
Morph
By kevinringer
05th Sep 2022 11:35

When I started in practice, HMRC (Inland Revenue as they were back then) were tasked with assessing and collecting tax. HMRC have long since stopped collecting tax as they pass all unpaid amounts to commercial debt collectors. MTD ITSA will result in HMRC ceasing to assess tax. So another question to ask is:

"What function will HMRC serve if MTD ITSA is implemented as intended"

HMRC Reply-

"Dunno"

That's because HMRC will cease to have a purpose. The Government will close it down with a huge cost saving to the Government.

Thanks (2)
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By geoffmw1
05th Sep 2022 10:50

The problem with HMRC is that those who work in it are all employees and most of them do not appreciate the complexities of bookkeeping and accounting.

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By SayWhatYouSee
05th Sep 2022 10:52

There is affordable software out there that solves for all these eventualities, for those looking, check out Hammock, handles joint ownerships, FHL and multiple MTD filings (if required)

Thanks (0)
Replying to SayWhatYouSee:
Morph
By kevinringer
05th Sep 2022 11:37

How can it handle these if HMRC haven't decided on the rules?

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Replying to SayWhatYouSee:
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By adjadj
05th Sep 2022 15:38

The choice of software is driven by many factors; tax reporting is just one of them. Unless there are multiple suppliers providing solutions then taxpayers with joint income will face a limited choice or a monopoly, either will be unacceptable

Thanks (2)
Replying to adjadj:
Tornado
By Tornado
05th Sep 2022 16:09

Rental Income & Self-Assessment = Easy to deal with as Accounts are prepared by one person/accountant after the year has finished. The figures are based on verified and reconciled information and each owner apportions income and expenses to themselves in their respective Self-Assessment Returns within the generous but necessary 10 month period after the end of the tax year.

MTD = Impossible to deal with on an on-going basis and pointless anyway as the correct figures can be Returned once a year on a single Tax Return for each individual taxpayer.

Thanks (4)

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