In August 2016, the government published their proposals on how businesses will maintain their accounting records for tax purposes in the future and also how businesses will report their profits to HMRC. At the end of January 2017, after consideration of suggestions made by interested parties, revised proposals on many aspects of the new regime were published. This article seeks to set out how these proposals, known as Making Tax Digital for Business (MTDfB) could affect your property business.
At the moment, landlords keep their accounting records in a variety of ways, from paper records, spreadsheets or accounting software. These records are then used to prepare a tax return for the property business at a later date. From the start of the accounting period which begins on 6 April 2018, all but the smallest of unincorporated property businesses will be required to:
• maintain their records digitally, through software or apps
• report summary information to HMRC quarterly through their ‘digital tax accounts’ (DTAs)
• make an ‘End of Year’ declaration through their DTAs.
DTAs are like on-line bank accounts – secure areas where a business can see all of their tax details in one place and interact with HMRC digitally.
What are digital records?
A digital record is a record of data for each transaction of the business. The proposed minimum required data will be:
• date rentals due (and payment received date if using cash basis of accounting – see later)
• rental value
• invoice date and value for expenses
• expense category
• deducted amount / percentage for expenses.
The software that could be used may be a smartphone app or software on a tablet or a desk-based computer. This software would be able to scan paper invoices and receipts into the software, using a smartphone camera. The software will be available from third party suppliers and HMRC have confirmed they will ensure there will be some products which are free of charge.
Tax legislation contains a variety of rules on allowable and non-allowable expenses. So transactions will need to be categorised in the software into expense types – for example advertising or professional expenses.
Where multiple properties are held within a property business, income and expenditure only has to be recorded for the property business as a whole and does not have to be allocated to individual properties. There will however, be a requirement to maintain details of each property’s address in the digital records.
The software will either store the records locally, for example on a computer, or in the cloud. HMRC expect that the software will, after an initial phase of manually assigning transactions to expense categories, start to recognise regular items and automatically assign them.
Under the original proposals, HMRC envisaged that a digital record would include not only a record of each item of income and expense but also evidence of each transaction such as copies of invoices and receipts. In the revised proposals the requirement to keep digital records will not include an obligation to store images of invoices and receipts digitally.
HMRC are aware that a lot of property businesses use spreadsheets to currently record their data and have now confirmed that spreadsheets will be one of the options for maintaining digital records. But users will need to ensure that the spreadsheet is able to meet all the necessary requirements of MTDfB (ie not just keeping a record of each transaction but also providing quarterly summary updates and End of Year information).
Businesses will need to use software appropriate to their business requirements. For example, a property partnership will need software that can record the partners’ details and profit shares.
Once all the relevant data for a quarter has been compiled into the software, the landlord will then feed this data directly into HMRC systems. The information that will be sent to HMRC will be summary data for the quarter, not all income and expense items. It is envisaged that the analysis of the data will be similar to the existing categories in the Self Assessment tax return. Smaller property businesses will be able to prepare an update that contains only three lines of data – income, expenses and profit. If your property business already completes a VAT return then the MTD updates will only include the current (nine box) VAT return from April 2019.
When the quarterly update is due, landlords will have one month to compile their records and complete the update.
So the first quarterly return will be required for the three months to 5 July 2018 and needs to be sent to HMRC by 5 August 2018.
What about a tax return for the property business?
Throughout the year, landlords will have provided HMRC with regular updates, building a picture of their net income for the year. However, many businesses will need to make adjustments to that information, for example reconsidering which expenses are not allowable for tax. Landlords will then make a declaration that everything is complete and correct as regards their property business – an ‘End of Year’ declaration. The landlord will have until 31 January following the tax year to complete the End of Year declaration.
So the first End of Year declaration will be required for the 12 months to 5 April 2019 and needs to be sent to HMRC by 31 January 2020.
Where a capital gain arises on the disposal of a property it would be optional to show this gain in the quarterly update but it would have to be included in the End of Year declaration.
Changes to accounting basis
Alongside the changes being brought in by MTDfB, there are also proposed amendments to the way that unincorporated property businesses account for their property income. These proposals will make cash basis accounting the default option for smaller unincorporated property businesses unless they elect to use the accruals basis.
The cash basis means the business accounts for income and expenses when the income is received and expenses are paid. The accruals basis means accounting for income over the period to which it relates and accounting for expenses in the period in which the liability is incurred.
These changes are due to start from 6 April 2017 although a decision as to whether to use the new cash basis or maintain the existing accruals basis does not have to be made until the 2017/18 tax return is submitted. Please contact us if you require more details on cash basis accounting and the new rules.
The original proposals were that all unincorporated property businesses with annual rental income below £10,000 would be exempted from maintaining digital records. In addition there would be a deferment of the start date to April 2019 for property businesses with annual rental income above £10,000. This exemption and deferment are now being considered further by the government and they will make a final decision later this year.
What about properties owned by a partnership or jointly?
The principles of the proposed system for partners and partnerships are:
• the partnership, rather than each partner, will be responsible for the central requirements of MTDfB (keeping a record of each transaction, providing quarterly summary updates and End of Year information)
• a nominated partner will fulfil these obligations
• there will be an option for the nominated partner to ‘push’ quarterly summary information of their share of the profit to each partner’s DTA. Each partner under this option would therefore have an estimate of their profit to date in the tax year
• when the End of Year declaration is made, the nominated partner will be obliged to ‘push’ each partner’s share of profits to their DTAs.
The above rules applying to partnerships would not apply to property that is jointly held. In this situation each individual who received income from jointly held property would report that income separately.
How we can help you
Please note that, at the moment, you do not have to do anything in respect of these developments. However, please be assured that we will continue to assist you with your tax affairs and we will keep you informed of developments in the Making Tax Digital for Business project.
Please speak to us if you have any questions regarding Making Tax Digital.