The Government are bringing everybody into the 21st Century by making tax digital!
Self employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for making tax digital for income tax from the 6th April 2024.
Some businesses and agents are likely to keep digital records. Providing updates to HMRC as part of a live pilot to test and develop the making tax digital service for income tax.
One of the main reasons that the Government are making tax digital is to streamline tax, improving the accuracy and efficiency or making the whole process behind taxation easier for tax payers to manage as well as the Government. However, there is also a downside to it. It looks as though the Government will also use it for brining in quarterly payments in future for annual tax rather than at the end of every year.
The Government in their wisdom have decided to target landlords first as one of the main groups in order for them to test it over a period of time.
Making tax digital for income tax – threshold and exemption
The HMRC will apply a threshold for making tax digital for various groups but will go live on the date of the 6th April 2024 for sole traders and landlords and for general partnerships in 2025.
This means that sole traders, covering general partnership with landlords with businesses of a property income of more than £10,000.00 will need to adopt the making tax digital for their income tax return.
You will need to maintain digital records of your business income and expenditure. Making tax digital means that you will need to send quarterly updates to the HMRC. Using software that is functioning and compatible with making tax digital. In this way the HMRC will get an up-to-date picture of your earnings and costings.
The quarterly reports will be per business and will be drawn together with an end of period statement against the business. You will then be required to submit your final declaration which is per individual drawing together with all of your income, expenditure, adjustments and allowances.
HMRC says Trusts, estates, trustees of registered pension schemes and non-resident Companies will be exempt from making tax digital for at least when it first comes into effect.
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What does it mean for landlords?
Making tax digital for income tax has been a long part of the Governments UK long running plan to digitize the tax system.
In doing so it makes life easier for individual businesses who because their records are digital to improve visibility into their finances. This empowers better decision making and the ability to spot problems before they arise. It also allows the Government to tax you on a quarterly basis.
As of April 2024, many individuals currently using self-assessment will be required to swift to making tax digital for income tax accounting and reporting. This includes landlords. However, it only includes landlords if their property or properties rent exceeds £10,000 per annum.
It also affects sole traders. If a landlord is a sole trader too, then the income from the sole trader business they own, plus the income from properties is added together for the purposes of determining if that individuals mandate is for making tax digital.
What do landlords need to do for making tax digital for income tax?
The rules of making tax digital for income tax are as follows: –
- A software compatible with making tax digital for income tax must be used for accounting in relation to your income tax. Your accounting records relating to income tax must be held digitally. Then kept for the required period of the tax end normally currently five years. Note you may need to activate the making tax digital income tax in your software.
- You or your accountant must register for making tax digital before the 6th April 2024. If you are already registered for self-assessment or have already registered for making tax digital you will not be transferred across automatically when it comes through.
- You will no longer need to send in a self-assessment return for your income tax. This will be submitted in addition to fulfilling your requirements that arise from making tax digital for income tax.
- You must provide the HMRC with quarterly updates using software. You can send more quarterly updates if it helps your situation. There is no legal requirement for the updates to be accurate, but doing so will help keep you predicted tax and national insurance liability.
- By the 31st January following the end of the tax year, you must use the software to provide the HMRC with an end of period statement. This will detail your property income and allowable expenses. If you are a sole trader business then it needs to also submit an EOPS for each one. These should follow the end of the accounting period for that business or be submitted by the 31st January at the latest.
- By the 31st January following the end of the tax year, you must use the software to provide HMRC with the final declaration of your income. If you have any income from a sole trader business then you will need to include this too.
- By the 31st January, you will need to pay the balance of any tax and national insurance contribution due. Note that the payment on account system will continue so you may need to make a further payment on the 31st July of the same year.
How do landlords work out their income tax for making tax digital for income tax?
If you are not a sole trader, all you will need to do is calculate the rental income you receive from one or more properties you own. If the total income received is more than £10,000.00 per annum then you will need to register. Then use the making tax digital for income tax for your accounting relating to your property rental.
To work out your income for the purpose of making tax digital for income tax, the rental income should be combined with the income from any sole trader business you own.
If the total comes to more than £10,000.00, you will need to register for and then use making tax digital for income tax.
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What information do landlords need to send as part of making tax digital for income tax?
There will be no real change when it comes to the information you need to provide. It is very much the same as the self-assessment tax return.
You will still need to declare your income. Where it has come from and you will still need to declare the allowable expenses.
The difference is that you will need to provide this information to the HMRC more frequently. For example every quarter and you will need to do it through a software.
How do landlords sign up for making tax digital for income tax?
You can sign up via the Government website.
But it is anticipated that the HMRC will open up a portal to sign up most people from the 6th April 2024. This being the mandate date. We will keep you updated.
There is a pilot scheme running in relation to the scheme. However if you wish to join this then you need to contact the Government.
We would suggest that you do refer the matter to your accountant to look at it.
What is the timetable?
There is an initial two-year timeline for requirements for a landlord to use the making tax digital. This is from April 2024 through to April 2026.
These are as follows: –
Before April 2024.
You need to sign up for the making tax digital. Potentially upgrade your accounting software and inform your accountant.
5TH August 2024.
This is the last date in which the first quarterly update for 2024/2025 must be submitted using the software.
5th November 2024.
This is the last date in which the second quarterly update must be submitted.
31st January 2025.
Any self-assessment tax return for 2023/2024 is due. If you have already signed up to the making tax digital pilot scheme you won’t need to submit this final return.
5th February 2025.
This is the last date by which the third quarterly updates of 2024/2025 must be submitted using the software.
5th May 2025.
This is the last date by which the full quarterly update of 2024/2025 must be submitted using the software
5th August 2025.
The last date by which the first quarterly update for 2025/2026 must be submitted and so on.
Our final thoughts on making tax digital for income tax for landlords
The Government is forever brining changes in for landlords when it comes to making tax as well as additional requirements. This impacts millions of people and some who don’t even realise that they are running a business.
Some landlords it can be quite simple. It is just a question of logging rents alongside money spent on property and others it will not.
The legal enforcement required to use the software is a surprise. However, it is something that the Inland Revenue have been moving towards for some considerable time.
We would suggest that you start looking at preparations now. Speak to your accountant on what you will need to do in future. It may be just the way that you process payment’s etc.