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  • Tax

    HMRC "Making Tax Digital" for landlords

    I saw a mention last year that HMRC would be moving to a digital reporting system, and returns would have to be submitted quarterly.

    Today I got sent a link with more details   http://www.simplybusiness.co.uk/knowledg...eb19trades

    I suspect the larger landlords will already be prepared for the changes but smaller independants may not be aware.

    Key points for me (running a self employed business, and occasional landlord) are :

    Provisional implementation date (non-vat registered / landlord) is April 2020 "at earliest".

    All my records must be kept digitally, on approved software.

    Data must be submitted automatically to HMRC system (no manual data entry), specialist software is premitted to convert from my data to HMRC format.

    Returns must be submitted quartery, any payment / overpayments will be calculated at the end of the year.

    Note. While the government has estimated costs of £70 a year over four years for small businesses implementing Making Tax Digital, the Institute of Chartered Accountants in England and Wales puts it at £1,250.

    HMRC list of approved software https://www.gov.uk/guidance/software-for...ax-updates

    A recent HMRC webinar for landlord tax returns explains the 2019 process, but not the 2020 changes (unless I missed them) http://www.propertytribes.com/hmrc-runni...38083.html

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    Making Tax Digital is a good idea but it will definitely hit small businesses and those you favour manual processes. Whether it will roll out quite so quickly to non-VAT registered individuals will depend on the outcome of the launch in April. So far the public reports are that the industry has had its head in the sand and not ready for MTD so things may be delayed.

    However it is a fairly straight forward process. Your costs will only rise noticeably if one tends to do all the books and tax themselves. Technology would reduce costs so that advisor fees are reduced - the net will be a small increase much more like HMRC's figure. As usual ICAEW's fee estimates are skewed by the larger firms who have massive overheads.

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    Chartered Accountant, Tax Advisor and Mortgage broker

    (and BTL portfolio owner)

    stuart@johnsonsca.com

    02039077022


    Note when talking of delays, that it has ALREADY been delayed! It's now two years late, and counting!

    https://www.accountancydaily.co/making-t...except-vat

    "The original plan from the government and HMRC would have forced the smallest businesses and sole traders to start quarterly reporting from April 2017, but those below the VAT threshold (currently £85,000) will now be exempt from requirements to quarterly report until the government can reassess the plans."

    That article also mentions "Changes at the Treasury after the election seem to have resulted in a more sensible approach to the whole Making Tax Digital debacle.". Not just that, but the 2017 snap election really screwed up the Treasury's plans and derailed the project significantly. It's covered regularly on BBC Moneybox on R4.


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    I suspect this idea might be quietly shelved like a lot of other government plans .... ! Smile

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    Looking into this today, it has been pointed out that proportionally this will be a major cost (new software + time) for small self-employed who currently do their own book-keeping, especially those who ony have a business registered so they can legally accept occasional paid work (semi-retired / seasonal workers).

    Being forced to invest in new software costs, additional admin time, quarterly returns (and the possibility of quarterly fines if they miss their deadlines) will make many question if they should just close their business. Will this lead to an increase in undeclared earnings?

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    Making Tax Digital is almost certainly coming for Landlords and it will involve considerable additional expense and administration.

    It will require four quarterly tax returns and one annual tax return as opposed to the one annual return most Landlords are currently required to provide.

    It also will require the use of approved software and digital record keeping (i.e. a general ledger with double entry accounting). This could be provided by an Accountant (outsourced) or the Landlords could purchase/subscribe to the software and operate it themselves either employing a bookkeeper or spending their own time entering data and reconciling transactions.

    For Landlords with only one or two properties who usually provide their bank and mortgage statements and their paid invoices, receipts and expenses to their accountants once a year this is a considerable extra expense and administrative burden.

    There are likely to be punitive fines for late Quarterly returns and the Annual return will need to match the sum of the Quarterly returns exactly or you will need to do some explaining to HMRC (all things being equal this should not be a problem but mistakes can happen).

    What is the purpose of the Quarterly returns? Well initially they will not do much other than act as a reporting mechanism to HMRC regarding the Tax they are going to be receiving from the Landlord. BUT ….

    The whole point of Making Tax Digital is “real time” (or close to real time) reporting AND payment of Taxes so it seems HIGHLY LIKELY that in the not too distant future landlords will be required to make Quarterly PAYMENTS of Tax based on their Quarterly returns (anyone who runs a business that employs people will already know that the Payroll/PAYE is reported monthly to HMRC and payments must be made by the 22nd of the following month and this will be a similar scenario).


    Is this change a bad thing? In my opinion yes. It adds extra expense and work to small Landlords and may encourage them to exit the market (which would fit in with the Government’s wider plans for the PRS anyway so that is plausible) and due to the way that property ownership maintenance/repairs and lettings work it could actually result in cashflow issues for some Landlords (i.e. in the first Quarter a Landlord earns a lot of rent with no expenses and pays the Tax due, in the second Quarter a tenant absconds owing rent and leaving a large repair bill but the Landlord has a low cash balance due to the payment of the Tax for the previous Quarter – okay I am probably getting ahead of myself here but I can definitely see some issues).


    I think this is something that small, say one to five property, landlords* should be taking a serious look at and they should also start the process of “becoming digital” right now. Do not wait. It takes a while to set up new accounting software and in the leadup to the MTD date bookkeepers and Accountants could become very busy helping other people get set up. Now is the time to get ahead of the game or perhaps decide to exit the market.


    * I am assuming that landlords operating through a company or with more than a few properties are already “digital” but if they are not again, now would be a good time to become so. We went digital a few years back after our Accountants implored and cajoled us to move to a full GL/DE approach for our financial records.

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    From the links, it seems to be aimed at ALL businesses. I'm not getting any source for the idea that landlords are being singled out? Any professional business should be keeping these accounts properly anyway. There may be teething troubles but perhaps it'll be a good thing to help the quill pen and paper brigade get up to date technology.

    As for the "considerable extra cost", I hardly think £4.50 /month will break the bank? https://www.quickfile.co.uk/making-tax-digital


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    Landlords are not being singled out per se. MTD does (will) indeed apply to all businesses and will eventually apply to everyone who is required to complete a Tax Return (i.e. anyone who earns income other than as a PAYE Employee) but Landlords are among the first to be included in the MTD implementation.

    I agree that professionally run businesses should be keeping good records but for a Landlord with only one or maybe two properties keeping simple digital records using Spreadsheets and scans of supporting documents like bank and Mortgage Statements and paid Invoices etc. is perfectly fine and professional enough.


    If you only have one or two properties, then using double entry accounting and posting transaction to a General Ledger is a bit of overkill and it does add more time and expense for the smaller Landlords that up to now has not been required.

    The subscription cost of the SaaS Accounting Packages like Xero (which we use for most of our businesses) or Quickfile is only part of the cost. The set-up can or could be quite involved/costly (relative to the income produced by only one or two properties) and the operation is where the expense could really add up (again relative to the income from one or two properties).


    Landlords can of course operate this software themselves and I guess it depends on how they value their time as to what the “cost” is, or they could outsource this to a Bookkeeper or Accounting firm.


    For anyone with a reasonable sized portfolio it is probably worth employing a bookkeeper directly (but this brings other costs and obligations like PAYE, NIC, Pensions etc. so is not to be taken lightly).


    Essentially, I see the smaller Landlords being most adversely affected by MTD and it may be another “nail in the coffin” to persuade them to exit the PRS and invest their money elsewhere – which is exactly what the Government wants to happen.


    New investors intending to become Landlords may also be dissuaded (again which is exactly what the Government wants to happen).


    It seems to me that, like many other industries there, is a minimum size that will make being a Landlord “worthwhile” and it is not five or less properties (I think the “average” Landlord in the UK has less than two properties).

    Existing small landlords and new entrants will need a business plan to get big enough to achieve some economies of scale otherwise it will not be worth them entering or staying in the PRS in my opinion.

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    So far from what I've read, I believe that quarterly tax returns will be a disaster, for me at least. I would very much like someone to convince me otherwise.

    I currently compile all of my tax figures myself. Bank statement downloads, day to day expense cost records and monthly rental income logs per property etc plus, income and expenditure from my occasional personal self-employment. I then issue to my account who charges £500 for the privilege of filling in the tax forms and submitting to HMRC.

    To have to now do this quarterly, I see as not only quadrupling my accountancy costs but also, my time. It takes the same time to download a bank statement and sort a spreadsheet whether it covers 12 months of data or just 3.

    And as others have said, if I've now got to purchase specialist software and re-jig my processes, it is going to create even more hassle.

    So far, not too impressed with the proposal.

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    I’d guess it’ll quietly put on the back burner for a while, its a big jump for many businesses that operate under the vat threshold to go fully digital, many work on the basis of envelopes full of receipts and invoices that get sorted onnce a year. After the vat registered companies are into the system it’ll move onto those that pay higher rate tax, pulling all those on basic rate into the system will cause uproar, will mini cab drivers be expected to log and record every fare? That would certainly put cat amongst the pidgeons.

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