Digital tax U-turn - what does this mean for you?
Tax has been a hot topic in the Private Rented Sector (PRS) over the last two years – principally thanks to the implementation of a new tax system earlier this year which means that by 2020, landlords will no longer be able to claim interest tax relief on their buy-to-let mortgages.
The prospect of the new system caused many landlords to consider incorporation, while there was also a high court campaign against the changes – led by Cherie Blair – which ultimately proved unsuccessful.
While the changes to the way landlords claim mortgage interest tax relief have grabbed the majority of the headlines, there's been another tax initiative which will affect the PRS edging closer to implementation.
Making Tax Digital (MTD) is a Government project led by Her Majesty's Revenue & Customs (HMRC) which aims to achieve what it sets out in its name.
Since MTD was first announced in 2015, its criteria and start date for landlords have changed several times.
Below, we explain what MTD means for landlords and how plans for its implementation have shifted in recent months...
What is Making Tax Digital?
It is a project intending to achieve a simple concept – namely making the tax system quicker, more accurate and more efficient.
The Government's official wording says it is designed to 'make it easier for individuals and businesses to get their tax right and keep on top of their affairs’.
Essentially, it will mean the end of annual tax returns for the millions of self-employed, replaced instead with digital quarterly reporting.
MTD is set out with four foundations: 'Better use of information', 'Tax in real time', 'A single financial account' and 'Interacting digitally with customers'.
How will it affect landlords?
Many landlords currently detail their business records on paper or via Excel spreadsheets. Under MTD, this will have to change.
According to research by the Residential Landlords Association, 48% of landlords use spreadsheets for record-keeping; while 38% use paper records and 13% use specialist software.
MTD will require most landlords to undertake digital record-keeping and quarterly reporting instead of an annual return.
Each quarterly report will have to be filed one month after the end of that quarter, and then an end of year final report and declaration will need to be supplied around 10 months after the end of the last quarter.
Digital records will need to include information such as when rental payments were due, rental values and expenses incurred by the landlord.
Landlords with an annual rental turnover of less than £10,000 will be exempt from the changes.
Meanwhile, businesses with turnover below the VAT threshold of £85,000 will be able to adapt to the new system at their own pace, with the option to join voluntarily from April 2019.
MTD will, however, be mandatory for property businesses with a turnover above the VAT threshold of £85,000. They will need to comply from April 2019.
These firms will only have to keep digital records for VAT purposes. The Government has confirmed that they will not be asked to keep digital records - or update HMRC quarterly - for other taxes until at least 2020.
What’s changed recently?
Originally, the new system was going to be introduced for landlords with a turnover above £10,000 in April 2018. However, in his March Budget Chancellor Philip Hammond announced that the changes would be delayed until April 2019 for landlords with a turnover below the VAT threshold of £85,000.
A further U-turn was made public in July when Financial Secretary to the Treasury Mel Stride announced that the system would be made voluntary for landlords with a turnover below the minimum VAT threshold.
What's more, it has now been delayed to April 2019 for those with a turnover above £85,000 and will only be required for VAT purposes.
Mandatory digital reporting for other taxes will not be required until at least 2020.
- November 2015: George Osborne announces initial details of Making Tax Digital in Autumn Statement.
- August 2016: HMRC launches official consultation on MTD thresholds for landlords.
- November 2016: Official consultation period closes.
- March 2017: Philip Hammond announces that MTD will be delayed until April 2019 for landlords with turnover below VAT threshold.
- July 2017: Government announces that MTD will be delayed from April 2018 to April 2019 for landlords with turnover above VAT threshold of £85,000.
Moving forward with the tax changes
As we can see, the MTD initiative has been delayed and will not affect as many landlords as originally expected. However, the Government has already made several changes to the criteria and time frame of MTD, so there’s no guaranteeing further changes won't occur over the coming months.
It's vital that all landlords stay up to date with the rollout of MTD and keep an eye on how and when they will need to act.
If you're concerned about the tax changes or want to find out more about how they will affect you, it could be beneficial to speak to an experienced letting agent or a landlord tax expert.