Making Tax Digital - what's next for landlords?

Paying tax was famously described as one of life’s few certainties. And sure enough, it’s a yearly task for every landlord. But the government’s new Tax Administration Strategy is bringing in changes to how businesses, sole traders and earners such as landlords will declare tax in future, from using approved software to making quarterly reports. Called ‘Making Tax Digital’ (MTD), this new scheme is designed to help reduce the tax gap and make paying tax easier and more accurate for many – but what will it involve for landlords? Let’s take a look.

What is Making Tax Digital?

Making Tax Digital is a new scheme by which businesses, self-employed individuals and landlords will be required to keep digital records of their accounts via HMRC-approved software, and submit updates every three months. It’s already been phased in for VAT-registered businesses, and in the years ahead it will start to apply to smaller businesses, sole traders and landlords too.

Why is it being introduced?

The aim of MTD is to help people keep track of how much tax they owe throughout the year, enabling them to budget better for their final bill. The usual tax return deadline of 31^st January will still apply, but people will be able to keep track of their tax in real time, thereby minimising any careless mistakes, unexpected bills and difficulties paying.

The government also hopes the new scheme will reduce the ‘tax gap’ – the difference in the amount of tax the government expects to be paid compared to the amount it actually receives. In 2019-20, the tax gap amounted to an eye-watering £34.8bn.

How does Making Tax Digital work?

The current self-assessment system requires you to submit an online or paper form to HMRC every year. In replacing this system, MTD will require you to file quarterly updates digitally, including income and expenditure. You will then receive an estimate of the tax due, so you can budget for payment by the 31^st January deadline in the following calendar year.

As per usual, you will still need to send a final tax filing by this date so your bill can be fully calculated and you can pay your taxes, as well as claiming any allowances and relief.

Lucy Cohen, co-founder of Mazuma Money, believes the system will work well. “More regular tax returns mean landlords have a better day-to-day working knowledge of their income and expenditure,” she explains. “It’s easier to keep track on a digital system rather than just leaving everything in a shoebox until one yearly tax deadline.”

When is Making Tax Digital being introduced?

The first phase of MTD was introduced in 2019 for businesses that pay VAT with a turnover of more than £85,000 and, in November 2022, it was rolled out to all VAT-registered businesses.

Originally, MTD for income tax was meant to launch in 2023. However, due to the impact of the pandemic, this was delayed firstly to 2024 and then – due to the tough economic climate – was pushed back again to April 2026 for those earning more than £50,000 a year and April 2027 for those earning between £30,000 and £50,000.

As of yet, the government has not announced its approach to people earning an income of under £30,000 a year, so if that applies to you, it’s worth keeping an eye on MTD in case further announcements are made.

What does Making Tax Digital mean for landlords?

There’s no getting away from the fact that Making Tax Digital will be another big change for landlords after a period of considerable economic upheaval, which is part of the reason the government has delayed its introduction. If you’re registered for VAT, you should already be using the system, but for the many landlords who are not VAT-registered, there are still a few years of grace before you legally need to adopt it.

The biggest pressure will be the need to invest in HMRC-approved software and, as Lucy Cohen says, “learning a new system is never fun. Software is an additional expense, and often isn’t ideal for people who live in low-connectivity areas or who aren’t digital natives.”

But, on the whole, MTD is designed to be beneficial – helping you keep on top of your income and spend every quarter, so you always have a clear idea of your tax liabilities. “This way you can make the most of your money and make smart, timely expenditure decisions,” Lucy adds.

What can I do if I’ve missed the Making Tax Digital deadline?

At the moment, it’s only VAT-registered businesses that should have signed up by now. If you haven’t, you need to let HMRC know as soon as possible – for the most part, they have simply issued a warning to businesses who are late signing up but there’s no guarantee this will be the same once the income tax deadlines come into force.

What is known is that the penalty system for late submissions will be similar to speeding penalties for drivers. Once you hit a certain number of points, there’s an automatic £200 fine, and points depend on the number of submissions you’re required to make. It’s worth nothing that you also accrue penalties separately for VAT and income tax, so you could be penalised twice if you need to submit returns for both.

If you’re worried about incurring penalties, Lucy Cohen advises you to: “Speak to an accountant. They’ll be able to tell you exactly when MTD will affect you and how to avoid penalties. The penalty system looks complicated and while there might be a slight reprieve in the first stage on certain aspects of MTD filings, this doesn’t give you carte blanche to ignore the requirements of MTD, or to make deliberate or careless errors.”

What are the best ways to prepare for Making Tax Digital?

The key is giving yourself plenty of time to get used to the new system. Businesses are encouraged to sign up early so they can invest in the right HMRC-approved software and feel confident in its operation before the formal deadline hits and you’re at risk of penalties.

Those filing Self Assessment tax returns may already be able to sign up for MTD for income tax. If you rent out UK property, you can sign up already (with the exception of limited companies or if you’re operating as a partnership) – giving you the opportunity to get ahead with record-keeping and quarterly reports to HMRC.

Lucy backs this up, saying: “It’s important to get into the correct practices as soon as possible so that compliance becomes second nature to you and your business. I cannot stress strongly enough that ultimately, you can be penalised for failing to either pay your VAT bill or for not trying hard enough to follow the new MTD rules – including digital links and keeping digital records.”

However, accounting services like Mazuma offer help and support if you’re not comfortable with digital applications. Lucy gave us an example of how you can get help in this scenario  “If you’re a ‘paper person’ and MTD is your worst nightmare then look for a solution that is hard copy friendly, like our Purple Envelope service. You can submit all documentation to us by post, we’ll digitise it all for you and submit compliantly on your behalf! Job done!”

Handy ways you can save

Tax bills are never easy, but there are ways you can save and make your accounts that little bit easier in advance of MTD. For starters, did you know that you can reclaim tax on your landlords insurance by including it as an expense on your tax return?

But your landlord insurance can help with more than that – here at Protect My Let, we know how daunting the switch to Making Tax Digital may seem, so we’ve teamed up with Mazuma Money to offer an exclusive discount on MTD-compatible accounting software.

If your landlord insurance renewal date is coming up, get a quote today and enjoy money off the accounting software you’ll need for MTD – and a helping hand to get ready for the new system. Simply get in touch and talk to real people (not robots) who’ll be able to help.