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Screenshot of Coconut's income streams feature
Coconut

Coconut release targets MTD ITSA multiple property conundrum

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Tax and accounting app Coconut’s new Income Streams functionality aims to solve the issues potentially faced by individuals with multiple sources of property and self-employment income when filing under MTD ITSA rules.

7th Sep 2022
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In the Q&A section of a recent MTD Bootcamp webinar, a viewer asked the following question about the government’s upcoming Making Tax Digital for income tax self assessment (MTD ITSA) regime: “For husband and wife landlords, can one digital record be kept or will they need to keep separate records?”

Variants of this question, and how arrangements for those with multiple sources of property income will work (or not) when making MTD ITSA filings have been a regular feature both above and below the comments line on this site.

In this week’s piece on MTD ITSA for landlords, AccountingWEB put the question above to HMRC: “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,” said the tax authority, which has promised to set out further guidance on MTD requirements for joint property owners in the coming months.

Tax and accounting app Coconut, however, hasn’t let the grass grow under its feet waiting for guidance, and it believes its new release provides a cost-effective solution to the issues outlined above.

Above all, sole traders and unincorporated landlords need a tool that’s simple and doesn’t require much training to use.”

As Coconut CEO Sam O’Connor explained to AccountingWEB, the app’s new Income Streams functionality aims to solve the specific problems faced by individuals with multiple sources of self-employment and property income.

Through Coconut’s software, users can create different Income Streams relating to different types of income – for example, sole trader businesses, rental properties or furnished holiday lets – from within one licence.

Transaction data is pulled from bank feeds and users can then examine individual transactions and define which Income Stream they relate to, allowing them to “unmuddle” client transactions, even if they’ve taken place across one or a mixture of personal and business accounts.

Coconut’s software then takes the transactions and splits them out into separate profit and loss (P&L) statements for the multiple Income Streams. These transactions can then be used to populate the required quarterly submissions, end-of-period statement and final declaration for MTD ITSA.

What this ultimately means – in theory – is that from one bank account and one Coconut licence a user can split out the different streams of income into multiple MTD ITSA filings, potentially solving the issue highlighted above.

UK landlord statistics

UK private landlords 4.4m
Individuals or groups of individuals 94%
Own fewer than five properties 85%

Building on the Income Streams foundations, users will also be able to create a related party to an income stream – for example, a share in a rental property – by pulling in data from an authorised bank account, and the user can reduce the percentage taken into account depending on the percentage owned.

While important for property management, this ability to separate out the percentages in terms of ownership is something O’Connor believes will also be crucial when Making Tax Digital for partnerships is finally mandated.

Coconut’s app also tackles the classic “single Tesco receipt with petrol for the van and a bit of shopping for later” conundrum, as users can split individual transactions between business and personal. 

The new features come rolled into the overall Coconut package at no additional cost to the current £7.50 monthly subscription fee. Coconut partner accountants and bookkeepers are able to access discounts to the published subscription price.

Release puts space between Coconut and traditional cloud players

UK government data shows that of the 4.4 million households in the UK’s private rental sector, 94% of landlords in England operate as “individuals or a group of individuals”, with 85% of them owning fewer than five properties.

For those rental properties with two or more owners, each owner is brought into the MTD ITSA regime if they earn more than £10,000 in income.

“The core issue for MTD ITSA is that sole traders and landlords often run their business through their personal account,” said O’Connor. “Unpicking business from personal transactions is an important function for healthy tax and accounts management. Above all, sole traders and unincorporated landlords need a tool that’s simple and doesn’t require much training to use.”

O’Connor went on to say that Coconut’s latest release “puts a lot of space” between the app and its cloud accounting software rivals. 

“They can’t connect things up,” he said. “Cloud accounting software is built for limited company entities, which in their nature are separated. Their strategy of building ‘lite’ versions where they just hack bits off existing functionality is flawed.

“We’re built for the finances of the individual and how they relate to MTD ITSA. It’s a fundamentally different concept than the foundations that traditional cloud accounting are built on,” continued O’Connor. “We bring everything together in one licence so you can extract the transactions from one or many bank accounts into multiple streams. By building the income streams in the way we have with separate P&Ls, the reporting and filing flows down from that.”

 

Replies (20)

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By NotAnAccountant2
07th Sep 2022 17:18

Quote:
What this ultimately means – in theory – is that from one bank account and one Coconut licence a user can split out the different streams of income into multiple MTD ITSA filings, potentially solving the issue highlighted above.

Solving the easy cases is easy!

Two brothers inherited a house and have let it out rather than sell it.

Each of the brothers is married and each couple also has a jointly owned let property.

Each married couple wants to keep one set of accounts for their let property (Duh!)
The pair of siblings wants to keep one set of accounts for their let property (ditto)

Each married couple thinks that the information about their jointly owned let property is nothing at all to do with the other married couple. Just because the brothers have a jointly owned property doesn't mean that they share any of the rest of their financial data.

We have three bank accounts, one for each property. A,B,C. To submit the data for the siblings the software needs access to all three accounts, B being the bank accounts for the siblings jointly owned property and A,C being the bank accounts for the married couples properties.

We can do this as two separate sets of software - but then the effort dealing with bank account B has to be done twice - or we can do it with one piece of software making all three submissions - but now the brothers can see the information related to the property their sibling owns with their wife.

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Replying to NotAnAccountant2:
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By GHarr497688
07th Sep 2022 17:58

this. is why it just can't work and even if we attempted to do it will everything come in on time - I doubt it. I am retiring anyway - no faith in HMRC anymore.

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Replying to NotAnAccountant2:
Sam O'Connor
By Sam O'Connor
07th Sep 2022 19:41

Hey, Sam O’Connor here, Coconut CEO.

Yeah that’s an interesting case. Particularly if both parties have the same accountant and the same software.

I think what you’re saying is that there’s one shared property between them, but other than that there is no overlap in finances.

So you want the shared property showing up in both as a % share and then everything else is independent. Is that understanding correct?

If so, the plan is to solve this problem by the ability to share the shared property accounts with the related party account. But that wouldn’t mean that both accounts are shared.

Do you think that solves it? Really interested to hear about these kinds of cases.

One question I have is whether each husband and wife would need independent accounts or can they use the same between the couple?

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Replying to samoconnor:
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By Hugo Fair
08th Sep 2022 00:28

Depends on (beneficial) ownership of each property ... companies, partnerships, individuals (joint tenancy), individuals (tenants in common) are all different.
But the entity of a taxpayer (in terms of ITSA) is what it 'says on the tin' = individual (not any combination/type of couple).

BTW, probably obvious, but the underlying database schema will be paramount as there are multiple 'parent' records so the primary keys will make or break it all.

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Replying to samoconnor:
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By NotAnAccountant2
08th Sep 2022 00:38

samoconnor wrote:

Hey, Sam O’Connor here, Coconut CEO.

Yeah that’s an interesting case. Particularly if both parties have the same accountant and the same software.

I think what you’re saying is that there’s one shared property between them, but other than that there is no overlap in finances.

So you want the shared property showing up in both as a % share and then everything else is independent. Is that understanding correct?

Yes. There are four tax returns which are completely independent other than some property.

But actually I think the 'same software, same accountant' is fairly easy - accountants must be used to situations like this where they do accounts for partners where only the partnership information is shared.

Where it gets hard is where there might be multiple accountants and/or different software - the two brothers above might each run their own company in different parts of the country. I don't know how accountants do this now but I'd guess that one does the let property work and then sends the relevant figures to the other for inclusion in the tax return.

I think HMRC needs to specify a standard for exporting and importing this data. Brother 1 does the property accounts in Coconut. Each quarter, as well as submitting his share he exports the other brother's share and sends it to him. That brother passes it on to his accountant, who imports it into sage along side the property empire that brother has.
Or the other way around, the property empire accountant does all the property, exports the quarterly figures for brother 1 from sage which brother 1 then imports into Coconut to include alongside the property he shares with his wife.

This could literally be the json that gets submitted to the API, Maybe signed. It doesn't need to be more than that, but it does need to be something that all software can support.

Otherwise you're going to get into the situation that because one owner has complex affairs that needs specialist software, all owners in the chain are going to be forced to use that same software.

Quote:

If so, the plan is to solve this problem by the ability to share the shared property accounts with the related party account. But that wouldn’t mean that both accounts are shared.

Do you think that solves it? Really interested to hear about these kinds of cases.

One question I have is whether each husband and wife would need independent accounts or can they use the same between the couple?

I think that would solve it where everybody is using the same software - HMRC should have solved this by having multiple property businesses in the API and linked those property businesses to one or more NINOs. Much like they're proposing for partnerships (at least last time I looked)

I think H&W should have the choice to have independent accounts. I would assume that the accountants here wouldn't share information about a wife's sole trader business with a husband or vice-versa without explicit authorization - even if they used a shared bank account for the business.

There's a bit of an obscure corner case possibly not covered by the above - one of the brothers sells his share to the other part way through the year. He needs to see the data relevant to his ownership but not the things once he's sold his share.

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Replying to NotAnAccountant2:
Sam O'Connor
By Sam O'Connor
08th Sep 2022 09:12

Very interesting. Thanks for sharing. We’re focussed on solving the majority case first and then we’ll work out from there. But we always aim to have non-standard or complex cases in mind while we build out the solution so we can support with a wider range of situations over time.

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By ireallyshouldknowthisbut
08th Sep 2022 09:38

Does your software cope with:

1. Changes in ownership mid year (this is very common)

2. Properties flipping between FHL and Residential lettings. Two different sets of rules for tax deductions and you cant usually work it out until after the year end which category it was so you will need to track both sets of rules all year and switch between them for any potential FHL. There are also tax adjustments when they do flip.

On FHL private use computations are complex too. Not sure how software will cope with that as some costs are applied to owners nights, and some not. Eg agents fees wont be deducted but utilities would be. This is not a quarterly computation but an annual one, but presumably you will need to report the deductions quarterly. Before you know what the % is, and so I assume you would need to estimate it, and then go back and redo it all in Q4.

You have to remember all these rules make sense on an annual basis as its easy to apply with the benefit of hindsight, its much more complex to try and apply annual rules before you know what the year looks like.

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Replying to ireallyshouldknowthisbut:
Sam O'Connor
By Sam O'Connor
08th Sep 2022 11:57

Yes, two interesting cases. We've built the software to cope with these scenarios.

The first is more straightforward. The second depends on at what point in the flow you're applying the tax treatment. We've considered this in our infrastructure and so will be able to cater to these needs at filing as MTD rolls out.

The starting point is making it really straightforward for the client to capture and share the data and really efficient for you to organise and prepare. Then at the point of filing have enough control to deal with these cases.

Flexibility and control are hugely important and something we think about a lot. It helps that we're not trying to reverse an existing architecture into the MTD ITSA problem, so it's easier for us to address these cases than other software.

Really useful to read these challenges as it helps us ensure we're on top of everything as we build.

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Replying to samoconnor:
By ireallyshouldknowthisbut
08th Sep 2022 14:01

@Sam, re the "point in the flow" you must need to know if its FHL or a residential letting at the point of the Q reporting or the data will be allocated to the wrong place. There are really 4 types of income coming under this. Sole trader, partnership, FHL, and residential lettings. You cant really think of "property income" as one category, its two with their own rules and deductions. This is not just a "tax thing", its a 'where you stick the data' thing.

You will also need to be able to very simply back it all out, and move to the other category on a property by property basis.

The more you know about this area, the more complex it is, which is why I think quite frankly you guys are wasting your time. This project is I am afraid doomed to be continually pushed forward a couple of years, and then another couple until somone has the good grace to cancel it.

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Replying to ireallyshouldknowthisbut:
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By richard thomas
11th Sep 2022 18:35

I don't agree that you need to know if it's FHL at the time of the QUs. Since the conditions apply for and have to be judged over a tax year (or in some cases 2 tax years), you cannot say at the start of the year that it will be an FHL. Yes, I know that you might be able to make a period of grace election, but that's something to be made in the return. In my view what you have is an ordinary UK or overseas residential property business until the end of the tax year or when you make the PoG (or averaging) election.

The silly boxes in the update direction for FHLs can be ignored and everything put in the ordinary property business boxes. The question of the different tax rules (esp finance costs and capital items) is a matter for the EOP statement - the requirements for the BUs are not for the tax allowable figures but the actual payments on a cash or accruals basis - adjustments of all types are made at EOP time, including private use adjustments.

Why I wonder incidentally is there no private use adjustment for traders in the EOP notice. I used to have an inspector working for me who was very keen to get pub landlords to acknowledge "private use of guard dog" as well as drinks etc.

My question for Sam is whether his software will deal with overseas lettings where an agent carries out all the transactions and shows them on a client account on their website, from which I can request a transfer of sums to my overseas bank account which I sometimes have great difficulty accessing online, let alone having a "feed" from it, (not that I know what that is).

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Replying to richard thomas:
Sam O'Connor
By Sam O'Connor
12th Sep 2022 09:45

Hi Richard, whilst you're right that we wouldn't have a feed for these transactions - unless the money was transferred into a UK account or Wise GBP account for example - you have the flexibility in the product to add manual transactions so you could easily manage this.

Does that answer the question or did I miss something?

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Replying to samoconnor:
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By richard thomas
12th Sep 2022 12:11

No it doesn't. I already do manual entries from the agent's account into my spreadsheet that I keep for the purposes of my tax return and my s 12B obligations. And it's not a matter of transfers of money, but of recording rents received and expenses paid out.

So I think unless one had a UK bank account from which one can take a feed (I don't think I can do that with my Lloyds personal account) into which the entries of the transaction of the overseas property business go, your software won't work for overseas property business, if I've understood this correctly (which is a long shot).

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By Winnie Wiggleroom
08th Sep 2022 10:29

"Coconut’s app also tackles the classic “single Tesco receipt with petrol for the van and a bit of shopping for later” conundrum, as users can split individual transactions between business and personal. "

Well you can do that already in all the softwares I have ever used, thats not the issue - the issue is that once someone starts seeing how quickly things can be done by setting up rules things will not be reported correctly (Tesco? oh yeah put that all automatically to fuel).

Like any tool, bank feeds are great in the right hands

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Replying to Winnie Wiggleroom:
Sam O'Connor
By Sam O'Connor
08th Sep 2022 14:04

Yes, not in and of itself unique, but what is unique is how simple it is for the client to use and how it's built-in, rather than a workaround. We always focus on ease of use so that clients can engage in spare moments and don't need training. But also limit the scope for errors so you need to spend less time fixing mistakes. I think this is very important for MTD ITSA clients.

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By K81
08th Sep 2022 10:33

i have a case of three siblings with equal shares in two rental properties. we prepare a set of rental accounts for the sibling we act for. a different accountant acts for another sibling & prepares the accounts for the other property - the third sibling completes their own tax returns.

who is responsible for what information here!

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Replying to K81:
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By NotAnAccountant2
08th Sep 2022 11:06

K81 wrote:

i have a case of three siblings with equal shares in two rental properties. we prepare a set of rental accounts for the sibling we act for. a different accountant acts for another sibling & prepares the accounts for the other property - the third sibling completes their own tax returns.

who is responsible for what information here!

Why can HMRC not answer this question? Once this is answered there will be follow up questions about corner cases but this is so fundamental that nothing else can be nailed down until this is answered.

One possible answer: One person is responsible for keeping the accounts for a particular property. They are responsible for providing the quarterly and EOPS numbers to be apportioned to the various owners. And they are responsible for providing the underlying transactional data should HMRC want to see it for one of the co-owners. Data from multiple properties is consolidated before submitting. This is pretty much how SA usually works today.

A second possible answer: Each taxpayer is responsible for keeping a full set of records for their property portfolio. I don't think that existing SA precludes doing it this way but it's a lot of extra work where properties are jointly owned.

A third possible answer: Either of the above two, or a combination of them is allowed.

There may be other ways of handling this - but I'd suggest that whatever is chosen, it's as similar as possible to the way that partnerships will be handled - because they'll have all the same issues to deal with (I think...)

Is it possible for mortgage finance costs to be assigned to a particular owner? A,B and C buy a property together. A puts in a 1/3 deposit, B and C agree to be responsible for the mortgage. All three have to be on the mortgage deed as that's the only thing the bank will accept but the three agree up front that A will not be responsible for paying the mortgage but will get 1/3 of the rent and 1/3 of the non-finance expenses. Mortgage expenses will only be allocated to B and C. I don't know if this is allowed (or whether other expenses might not be shared equally) but if it is it adds yet another wrinkle where B&C want to add in their finance costs after A has done the quarterly and EOPS calcs based on no mortgage.

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Replying to NotAnAccountant2:
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By richard thomas
11th Sep 2022 18:42

A fourth possible answer is to deem co-ownership or joint ownership to be a partnership. I believe this is the rule for VAT.

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By Winnie Wiggleroom
08th Sep 2022 12:39

Sam - are you able to gross up a net amount into the bank to take account of an amount received net of agents fees for example?

Not all software currently allows this.

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Replying to Winnie Wiggleroom:
Sam O'Connor
By Sam O'Connor
08th Sep 2022 14:00

We built this exact functionality for CIS subcontractors and launched it recently - link below. It's a really simple gross-up of income received net of CIS, and flexible so can cater to different amounts which is fairly unique to us.

https://www.accountingweb.co.uk/tech/accounting-software/coconut-rolls-o...

Now we have the income streams functionality launched, the aim is to get this same gross up out for other scenarios like this exact situation. Not live yet, but coming soon.

And a great suggestion - something simple that other software doesn't cater to, much like the CIS gross-up which is proving popular.

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Replying to samoconnor:
Sam O'Connor
By Sam O'Connor
09th Sep 2022 08:40

One point of clarity is that this is still doable today with a manual transaction with just a few clicks.

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