Jennifer Adams considers the potential impact of the proposals contained in yesterday's Making Tax Digital (MTD) consultation documents on landlords and their agents.
'Small landlords' - less than £10K rental
Throughout the working together process agents have been concerned as to how HMRC's impending digital tax system would affect smaller business, including landlords. The answer is to be found on page 1 of this document which announced that all unincorporated businesses and landlords with gross income or annual turnover below £10,000 would be exempt from the new quarterly reporting obligations; everyone else will have no choice.
The limit comes as a welcome surprise. The vast majority of landlords own one property with an average monthly rent outside of London being £745 per month – under the £10K annual limit. In using this amount HMRC are looking at the rental income on its own, such that if the landlord has other PAYE or pension income but less than £10K in rental income then quarterly submissions will not apply. HMRC is intending to delay implementation for other landlords but are only deferring the inevitable.
Between landlords and the smaller self employed it is arguably the landlord who will find the new system easier to comply with, not least because such taxpayers are usually more computer savvy.
Landlords who let via an agency will be least affected, as the information required for quarterly submissions will already be available on a monthly (or quarterly) basis. The document says nothing about letting agents submitting direct to HMRC, but that can surely only be a matter of time.
Compulsory use of software
As HMRC will not be issuing their own software, unless the software houses create free apps for those landlords with just one or two properties (which seems unlikely), then these landlords will be subjected to an additional cost of software purchase, Excel spreadsheets not being permitted (although according to sources), HMRC is looking at whether spreadsheets would be acceptable under MTD).
The consultation document states that: "HMRC has clearly signalled to developers that free software products, with free updates, must be available alongside a breadth of additional products catering for the wider market". The question must be asked – why should they – what's in it for them? There seems little reason to give a small landlord with two properties free use of a basic app.
The words used by HMRC are telling: "HMRC has clearly signalled to developers that free software products, with free updates, must be available alongside a breadth of additional products catering for the wider market". Another cost in line with other small self employed businesses, will be the compulsory purchase of a smart phone or scanner if not already owned.
Separate property accounting
Landlords with more than one property may have to change their method of accounting. Under MTD they will be required to submit each individual property address, and income and expenses attributable to each property, rather than submitting total figures as is currently required.
One point noted by HMRC is that software developers could assist users by ensuring that the purchase price or value of the property is loaded. This information would remain on the app until the property is sold thus alleviating the need to look back over past land registry papers for the information.
Property owned jointly – the requirement for a 'nominate individual'
Currently, each individual provides information on their own tax return detailing their share of the rental income and allowable expenses. HMRC wants joint owners to adopt a similar approach to that being required for partnerships, namely that one of the landlords be a ‘nominated individual’.
That 'nominated individual' would fulfil the obligations of MTD, namely maintaining digital records and providing regular updates on behalf of all the individuals who had an interest in the property(ies). These regular updates would automatically feed the estimated amounts into each individual’s digital tax account.
HMRC proposes extending the cash accounting method currently used by some self employed businesses to all unincorporated lettings as an option. Only unincorporated individuals (or partnerships of individuals) with small numbers of properties or those who have property income alongside another main source of income would be able to take advantage of the proposal.
Non UK resident landlords could also use this method as could furnished holiday lettings owners. Companies, trusts, holders of units in unit trusts, real estate investment trusts, partnerships with corporate members, limited liability partnerships and other similar, more complex entities would not be permitted to use this basis.
Whilst landlords with annual business income below £10,000 will not be mandated to keep their business records digitally or provide quarterly updates to HMRC, they will still be able to use this optional cash basis.
Currently many small landlords use the statutory concessionary basis which is available provided all of the following conditions are met:
- where, for any year, the total gross receipts of a rental business (before allowable expenses are deducted) do not exceed £15,000, and;
- the ‘cash basis’ is used consistently, and;
- the result is reasonable overall and does not differ substantially from the strict ‘earnings basis’.
Under the MTD proposal this non-statutory concession would be withdrawn. The new cash basis will require that the moratage is tied to the let properties, and mut not exceed the value of the proeprty. The restrictions on tax relief on mortgage interest for residential properties will remain, as per the Summer Budget 2015. Also the 'Replacement Relief' rules for items used inside the property will not be affected.
Using differing methods of calculation basis
One proposal that could lead to confusion is given on page 12, which covers the calculation of rental income by joint owners. In the situation where no formal partnership exists, HMRC envisages that each individual will be able to separately opt to report the profits from their personal rental business using the cash basis.
They ask whether there should be a method of 'opt in' for each of the property businesses separately (e.g. UK property business and overseas property business) or would it be better to choose whether to opt in for all the property business income or none of it? They do make the comment that they 'would expect that most will make joint decisions on whether to opt for the cash basis in order to simplify administration'. Yet this might not necessarily be the case.
One question concerns security deposits. HMRC give no view but ask how such deposits should be accounted for under the cash accounting method – i.e. recognise as income when received or when the landlord becomes entitled.
This method of tax payment will also be available to landlords similarly as to the self employed.
Over the next three months AccountingWEB will be collecting feedback to HMRC's package of MTD consultations. Feel free to raise any points about the different issues by commenting here, on the individual consultation summaries or our MTD frequently asked questions article. If you'd like to find out more about Making Tax Digital, register for our online MTD sessions at Practice Excellence LIVE! on 24 October.
AccountingWEB is working with Thomson Reuters Digita to collate the profession's feedback to the MTD consultation documents. You can participate in our quick survey here to share your thoughts. The survey responses will feed directly in to the official AccountingWEB response to the consultation documents.
This article has been amended to correct the position of deduction of interest under the proposed cash basis.