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MTD: The impact on landlords

18th Aug 2016
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Jennifer Adams considers the potential impact of the proposals contained in yesterday's Making Tax Digital (MTD) consultation documents on landlords and their agents.

Document 1: Making Tax Digital: Bringing business tax into the digital age

'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.

Document 4: Business Income Tax: Simplified cash basis for unincorporated property businesses

Cash accounting

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.

Security deposits

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.

Voluntary PAYG

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.

Replies (16)

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By SteveHa
19th Aug 2016 09:23

I love how MTD will not create an additional burden for the taxpayer, but will make things much easier for them. (Not!)

Thanks (5)
By Chipette
20th Aug 2016 18:34

Thank you for this article.
Would you please clarify whether the 10k limit is per individual or per property (in the case of joint owners)?

Thanks (2)
Replying to Chipette:
rebecca cave
By Rebecca Cave
22nd Aug 2016 14:45

My reading of the con docs is that the £10,000 turnouver threshold is per individual landlord, not per property. If the landlord has an employment as well as the rental income that employment income is not counted towards the £10,000.
However, if the landlord also has a self-employed business income in addition to his rental income that self-employed business turnover would count towards the £10,000 threshold.

Thanks (2)
By RobertD
22nd Aug 2016 11:29

Surely a landlord in London will be at a disadvantage to one in Newcastle. Seems to be pretty unfair.

Thanks (2)
By LAC47
22nd Aug 2016 12:16

Help....can't see how this will work at all. Time to retire I think

Thanks (1)
By Ian McTernan CTA
22nd Aug 2016 12:43

Here's where it all goes wrong for landlords:

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.

As anyone who deals with a landlord with multiple properties will know, all their expenses and income go into one or several accounts and credit cards and these are than pulled off into a spreadsheet without generally assigning them to a particular property- especially for those with small portfolios. Once they reach a certain size they will start using either their own spreadsheets or a commercial package but even then, there is a huge swathe of expenses that aren't incurred on one property but relate to several or all- and are apportioned at the end of the year.

Now we have to sort this out apparently every quarter but it won't cost any more...

It's quite clear whoever is advising HMRC on this only deals with massive landlords with their own accounting departments and totally fails to grasp how the majority of landlords operate.

Should be even more fun as we'll have to calculate interest relief as well on a sliding scale as MTD wants to happen half way through the transition.

Maybe they should rename this whole project to Forcing Tax Digital. I predict a complete mess, and as usual it will be us who have to try and patch it all together and explain it to clients who will have to adapt AND pay much higher fees whilst using systems they don't want to use.

Thanks (3)
By DMGbus
22nd Aug 2016 12:59

MTD appears to me to be an eminently suitable subject matter for a Commons Select Committee examination with pertinent questions as follows requiring specific answers:

1. How much extra cost will be incurred by taxpayers for software?
2. How much accountants extra fees will be incurred by taxpayers?
3. How much extra costs will accountants incur in software costs?
4. Why must individual transactions be reported rather than monthly or quarterly or yearly totals?
5. Some software / online services for photographing / scanning in receipts into a software package are currently, in practical terms, unreliable resulting in accounts records being inaccurate and requiring additional advisor time to put right the errors (factual example : ReceiptBank with Xero) - how will MTD solve this problem?
6. As there is no legal requirement to make quarterly tax payments on account, why must quarterly reporting be mandated?
7. VAT returns can currently be lawfully completed annually rather than quarterly for businesses with an annual turnover of less than £1.35 million - this measure was introduced to ease the administrative tax burdens on businesses, so why is the turnover limit for quarterly MTD reporting not set at the same fair level?
8. Where a tax payer or advisor finds that the administrative costs of MTD exceed the amounts stated in your answers to the preceding questions how can they reclaim compensation from HMRC or yourself?
9. What practical (hands on) experience of small business accounting do the promoters / advocates of MTD have?
10. How much financial benefit is estimated to accrue to the software industry as a result of MTD?
11. Which individuals have signed contracts with software suppliers regarding MTD?

Thanks (8)
By Arm266
22nd Aug 2016 14:14

One question that seems to be avoided generally is that every statement by HMRC is that those under £10k would be exempt from quarterly returns but those statements don't specify whether those under £10k would still have to prepare an annual return or whether they would be exempt altogether. Can anyone clarify, as this will effect nearly all my clients.

Thanks (0)
By lionelstock
22nd Aug 2016 14:23

Just get HMRC to let us know the output file format required, and many moderately tech-savvy individuals will be able to get Excel to produce the file.

Thanks (0)
By piers657
22nd Aug 2016 14:27

Appears to be an opportunity to increase clients and fees.
Accountants could specialise in properties and lettings.
Either, dedicated team within the practice or stand alone entities.
Become experts within the field and gain a reputation as "the go to guys" regarding properties and lettings.
Some firms may distant themselves; others may embrace the changes.

Thanks (0)
By Vaughan Blake1
22nd Aug 2016 14:36

"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".

I hope the developers clearly signal their response to providing free software and updates!

Thanks (1)
Replying to Vaughan Blake1:
By Rob Lelliott
22nd Aug 2016 16:10

This statement really stands out for me. EIther:

1. it's amazingly audacious
2. the software providers have been in on the MTD initiative from the start and have already promised they'll make free versions available knowing full well only the most basic functions will be free (suitable only for the smallest traders etc) and most businesses/larger landlords will have to pay for a more functional app, where they will more than recoup the cost.

Thanks (3)
By ruth.julian
22nd Aug 2016 18:54

The MTD proposals assume that all "landlords" have simple arrangements. I know of one case of 3 siblings where 2 are landlords in their own right, the third sibling is not UK resident, where they own one property in common with a separate interest in it from a family trust. The jointly held property has rental income less than £10K pa. Work that one out!

Thanks (0)
By RobertD
24th Aug 2016 11:05

...and what happens if the turnover ducks in and out of the £10k limit? This is the case for some rentals where it can be empty for periods.

Thanks (2)
By brian-scholar
25th Aug 2016 16:46

So, if a director of SPC draws dividends and also has one or more rental properties where the rent is under £10,000, will he have the quarterly reporting requirement?

Thanks (0)
By SimonLever
12th Sep 2016 12:16

There is a site which has software which is free for up to 3 properties at the moment.
Not a recommendation as I have not used it but maybe worth a look for the small landlord.

Thanks (0)