From April 2023 HMRC are proposing to make tax digital for income tax self assessment (MTD for ITSA).
What does this mean?
Basically for individual landlords with rental income above £10,000 they will be required to use software for their accounting and store their accounting records digitally.
Certainly MTD for ITSA may come as a shock to many individuals that privately own rental property, including residential, furnished holiday lets, commercial property and indeed non UK properties. Many smaller landlords tend to keep very basic accounting records but those with rental income of more than £10,000 per annum will need to register for MTD for ITSA for their accounting relating to property rentals.
For a landlord who is also a sole trader, it is a little more complicated in that their total rental income and sole trade income is considered when assessing the £10,000 threshold, eg
- Individual A rents out a property for £1,000 per month. Total rental income is £12,000, ie above the £10,000 threshold, and they will need to use MTD for ITSA.
- Individual B is a buy to let landlord who rents a property for £650 per month, ie £7,800 rent per annum. In addition they carry on a part time trade as an unincorporated plumber, ie a sole trader, and enjoy an income of £9,000. Their aggregate income is £16,800 which is above the £10,000 threshold and again they are required to use MTD for ITSA as of April 2023.
What does MTD for ITSA for landlords mean?
For those within its scope, rules for MTD for ITSA are as follows:
- Software compatible with MTD for ITSA must be used for accounting relating to income tax. The records must be held digitally and kept for the required period after the tax year ends (currently 6 years).
- Landlords must register for MTD for ITSA before 6 April 2023. Unfortunately those already registered for self assessment will not automatically be transferred when MTD for ITSA begins, a new registration will be required.
- Landlords may no longer need to send a self assessment tax return for income tax although one may be required in some cases to report other kinds of income outside the scope of MTD for ITSA, eg PAYE and pension income. This would need to be submitted in addition to fulfilling their requirements that arise from MTD for ITSA.
- The landlord must provide HMRC with quarterly updates using software that details all property income. By 31 January following the end of the tax year the landlord must also, using software, provide HMRC with an end of period statement (EOPS).
- Finally, by 31 January following the end of the tax year clients must use software to provide HMRC with a signed final declaration of their income. The tax payment date, being 31 January, and any required payments on account on 31 July will remain as due under the current regulations.
As you can see from the above, effectively six returns will now be required for those affected.
Bromhead will of course be assisting their clients to deal with these reporting obligations and will provide more information as more detail on the scheme requirements are released by HMRC.