Making tax digital for landlords
What is Making Tax Digital?
The ambitious Making Tax Digital scheme was introduced by the government in 2019 as part of a bold vision to make the UK “one of the most digitally advanced tax administrations in the world”. The scheme makes sweeping changes to the way the tax system works in an effort to “…make it easier for individuals and businesses to get their tax right and keep on top of their affairs”.
The UK government claims the changes will be “…more effective, more efficient and easier for taxpayers to get their tax right”. Simply, Making Tax Digital aims to move away from manual tax and VAT return to digital filing using HMRC-compatible software.
What does compatible software mean?
Whilst you may already use software to record your data digitally, under the new system HMRC will require the software to be compatible with their filling system in order to:
+ maintain business records as set out in the regulations
+ prepare and send quarterly updates and end-of-period statements using the information maintained in those records
+ finalise your business income and submit your declaration after the end of the tax year
+ communicate with HMRC digitally through our application programming interface (API) platform
You can find a list of compatible software on the government website here.
Whilst HMRC does recognise a spreadsheet as software as part of the Making Tax Digital scheme, given the rules surrounding linking data and manual interventions, this would only be recommended for individuals or businesses with very simple bookkeeping requirements. If you are currently using a non-compatible software or a spreadsheet you would need to export the data and import it into a bridging software in order to file your income tax.
How will this apply to Landlords?
As of April 6 2024, these changes will be implemented for landlords. If your earnings are below £10,000 a year, are part of a real estate investment trust or you are using the Rent A Room scheme to let out part of your primary residence these changes won’t apply to you.
In order to comply with HMRC’s new rules, landlords will be required to keep digital records and register with accounting software which aligns with HMRC’s online process. Landlords will be required to send HMRC updated accounts on a quarterly basis through their accounting software and HMRC digital tax account. At the end of the year, simply sign an End of Period Statement to confirm that your quarterly returns are accurate, no need to produce or file a self-assessment tax return. You will then have until the 31st of January in the following year to fully pay the tax owed as per usual.
Failure to comply with these changes will most likely result in penalties from HMRC. Filing a return without using a compatible software may result in charges up to £400 for each return and filing returns containing errors could result in penalties up to 100% of the tax you owe.