Making tax digital for landlords - Be ready!

Lee Sharpe looks at making tax digital and the key issues for landlords.

At the time of writing, the Chancellor’s spring statement 2019 advised that, while making tax digital (MTD) for VAT was going ahead, we would see no further developments until after 2020 at the earliest. 

In some respects, saying that MTD for VAT will apply but that other aspects of MTD will not, is a bit like arguing that a parrot is ‘only partly dead’. But for most landlords, MTD for VAT will have no impact. 

What does it mean?

It took no fewer than three attempts before HMRC would admit that MTD would cost businesses money. In fact, MTD is all about costing taxpayer’s money, with as little effort on HMRC’s part as possible. In principle, there are two parts to MTD:

(a) Keeping records in digital format – where MTD applies, basically records must be kept digitally. That is not to say that paper records such as receipts and invoices must be abolished, but the corresponding accounting records can no longer be kept by hand – cashbook, ledgers, etc. They need to be kept on a computer. Dedicated accounting software is preferred, although spreadsheets can be used – however, they will need specialised ‘bridging software’ to link them up and be MTD compliant.

(b) Electronic submission of returns – MTD also requires that the business must update HMRC regularly, online. 

Both of these are potentially problematic. Some businesses will have unusual accounting systems that mainstream accounting packages do not cater for and will struggle to adapt a standard MTD-ready programme for their own needs. Likewise, many business owners are used to an annual cycle of record-keeping and tax returns, while this will be at least quarterly under MTD (note that HMRC has often claimed that MTD does not mean four tax returns a year; this is strictly accurate - it means at least four, and potentially many more, depending on how many businesses you have!).

HMRC has become allergic to human intervention. Apparently, machines and software are perfect, and humans are the weak link in the chain. As far as HMRC is concerned, this means removing humans from the process as much as possible. So it is also necessary to ensure that the links between the figures in the records and the figures reported in the online returns to HMRC are fully automated; you can press a button to submit a return, but you cannot manually enter amounts in a return, even if they are only copied summaries from your now-digital accounting records. This can be problematic. 

MTD for VAT starts in April 2019. In some respects, MTD for VAT is a relatively easy ‘sell’ for HMRC, as VAT-registered businesses are already used to filing their VAT returns online, once a quarter (or more frequently, in some cases). With MTD for VAT, it is all about the move to digital record-keeping. There are some free MTD software packages but they are, of course, relatively simple programmes and will not be sufficient for the needs of many VAT-registered businesses. 

MTD for VAT is mandatory if your business’ (VAT-taxable) turnover exceeds the current VAT registration threshold of £85,000 per annum, in any period of up to 12 months (if it takes a business less than 12 months to reach £85,000 of taxable supplies, it has to register at that point, rather than wait for 12 months and then register). Businesses with lower annual turnovers do not need to register, even if they have voluntarily registered for VAT.

Note, however, that once a business has breached the registration threshold, it must adopt and maintain MTD for VAT even if its annual turnover subsequently falls below the threshold – HMRC reckons that, once businesses have adopted MTD, they will like it so much they will never want to leave. 

One of the key problems for VAT-registered businesses is that it can often take a lot of work ‘behind the scenes’ to get the figures in the nine boxes of your average VAT return to be correct – dealing with complexities such as partial exemption, buying and selling goods or services overseas, or special VAT accounting methods. This requires human intervention, which will be prohibited under MTD. So, HMRC has announced a 12-month ‘soft landing period’ during which it will not penalise manual intervention to ensure that the figures are correct, or if a business hasn’t quite managed to automate the link between digital records and digital filing. 

A business may claim exemption from MTD for VAT, if its principal(s) cannot use the software, by reason of (say) age, lack of access to the internet, or religion. As noted above, if a business’ annual turnover drops below the registration threshold, it must stick with MTD for VAT unless it cancels its VAT registration or another reason for exemption arises.

As above, non-VAT MTD has been postponed until 2021 at the earliest. But it will apply to almost all landlord and property developer businesses, many of which will not have been affected by MTD for VAT. 

We know very little about MTD for corporation tax, but the draft rules and regulations for MTD for income tax should serve as a useful template. Collectively, they are referred to as MTD for business or MTDB. 

MTDB is more wide-ranging than MTD for VAT; MTD for VAT requires digital record-keeping only for transactions that have any bearing for VAT purposes. But MTDB applies to any transactions that a person undertakes in the course of the business. While it could be argued that (for example) records of drawings would not be ‘in the course of the business’ it seems highly unlikely that a software developer would seek to exclude any category from digital record-keeping, and HMRC is also unlikely to discourage any category from being digitised.

MTDB will also mean that many non-VAT businesses that have grown accustomed to annual book-keeping, accounts, and return routines will have to adopt a quarterly regime; returns must be filed every three months so, practically speaking, records will have to be updated at least quarterly as well. 

The MTDB quarterly returns also expect more information alongside the numbers, such as:

This so-called ‘designatory data’ does not need to be submitted with each quarter’s return, but only when it changes; the overall effect, however, is the same. 

Just like with MTD for VAT, there are limited exemptions from MTDB, such as by reason of religion, or lack of access to adequate Internet infrastructure. For income tax purposes, there is also a de minimis annual turnover threshold below which MTD will not apply – currently £10,000 but it may well eventually be linked to the personal allowance instead (currently £12,500). 

This and time are the big issues for MTD; very simple businesses may be able to get by with the free or very cheap packages that some software houses are offering, but others will need to pay. 

On top of that is the fact that HMRC is adamant that user error is costing the Treasury billions in lost tax, so forcing people to go digital and minimising human intervention will narrow the ‘tax gap’, presumably because people will be paying more tax. 

Most letting businesses make only VAT-exempt supplies, so MTD for VAT will not apply. But landlord businesses that let commercial property, and businesses that get involved in property development, should check with a tax adviser to ensure that it not caught by MTD for VAT. 

Some property development is exempt, such as when a landlord re-develops existing dwellings; some is zero-rated, such as building brand new homes for onward sale; some is standard-rated, such as new-build commercial structures. If in doubt, check! There are penalties for failing to keep digital records and failing to make digital returns if you are caught by the regime.