Relaxed MTD rules for the self-employed and landlords with jointly owned properties

See our detailed article on Making Tax Digital for Income Tax Self Assessment.

H M Revenue & Customs (HMRC) have issued new Making Tax Digital (MTD) for Income Tax Self-Assessment relaxations. This is to help address issues for how owners of jointly held properties report their property income and expenses. There are also relaxed rules for the self-employed.

The basis of MTD for Self-Assessment is the submission of quarterly updates from digital accounting records. This would include submissions of quarterly totals of income and expenses and on a rolling to date basis, using predefined income and expense categories.

The new guidance looks at three specific cases of difficulty. It also looks at how to simplify matters for smaller businesses and landlords. The guidance covers three-line accounts, retailers and jointly owned properties.

Individual transactions are recorded in the detailed accounting records, but only totals are submitted each quarterly for each income and expense category. For smaller businesses and property landlords, only two total amounts need to be submitted if full HMRC relaxations are used.

Three-line accounts reporting for smaller self-employed and landlords

Three-line accounts are just two-line accounts, income and expenses. Profit or loss is the difference and makes up the third line, though this is just calculated from the other two amounts.

Self-employed individuals and those with property income, where their turnover / property income is below the VAT registration threshold, currently £90,000, can prepare and submit three-line quarterly updates. This is instead of reporting income by a few categories and rather than reporting self-employed individuals’ expenses over up to 15 categories and 8 categories of expenses for property owners.

However, residential property finance costs, e.g. mortgage interest, paid by landlords must always be reported separately from other expenses. In practice, this will often create a challenge e.g. where landlords do not receive monthly mortgage statements, showing monthly interest amounts.

Landlords in the current beta testing phase of MTD can report mortgage repayment as a single amount, rather than splitting out mortgage interest and the capital part of the actual full repayment. The reporting of annual over estimated mortgage payments can be resolved at the tax year-end reporting stage.

Retailers

Retailers only need to record a single daily gross takings amount in their digital records, rather than each individual sale transaction.

Jointly owned properties

Landlords must submit a single MTD quarterly update for their whole property portfolio. Their portfolio could be made up of personally owned properties and jointly owned properties. In addition, the properties could be managed by multiple agents and by the landlord personally.

One of the main requirements of MTD is to keep digital records AND have no manual rekeying of consolidated totals, from multiple property sources, when making the single quarterly update for the property portfolio. Once a transaction is entered into any of your accounting records, the income and expense quarterly category totals should automatically be generated and submitted to HMRC. We can only see a spreadsheet-based consolidation behind the scenes which is then submitted to HMRC being practical, even with a landlord with a handful of jointly / personally owned and managed properties!

Landlords with joint owned properties only needs to record and report their share of the property’s income and expenses. A landlord with multiple agents and different percentage ownerships is going to have a challenge on their hands.

Landlords can choose to maintain full digital records or apply the HMRC relaxations. This allows landlords to record a single total amount of their:

• property income received during a quarter, and then

• property expenses paid for the full tax year.

Using the relaxations, income for jointly owned properties is therefore reported quarterly, but expenses are reported annually.

Quarterly updates and year end updates

Landlords with jointly owned properties can elect to report totals for each category of income and expense in their quarterly updates or just to report their income, but not their expenses. Their share of expenses would be reported annually, through the tax year-end finalisation process.

If an individual landlord elects not to use three-line accounts, or is unable to because of the amount of their income (if over ££90,000), the situation could be similar. However, the individual landlord would report their total income by category each quarter, and their total expenses by category at the tax year end.

Final comment

Only reporting income each quarter (and not expenses) means HMRC’s quarterly tax estimates will be highly inaccurate for joint property owners. Giving taxpayers an idea of their quarterly tax amounts was one of the original ideas behind MTD and quarterly updates.

With jointly owned properties, the practical complexities of making quarterly submissions will mean significant relaxations to make the system work!