Making Tax Digital (MTD) for Landlords

What is Making Tax Digital (MTD)?

Making Tax Digital (MTD) is a key part of the government’s Tax Administration Strategy. This 10-year strategy aims to build a trusted, modern tax administration system. Through the adoption of a new administration system, the government’s aim is to improve their resilience, effectiveness and support for taxpayers. These changes, will have a broad impact, affecting various groups of taxpayers, including businesses, self-employed individuals, landlords, and individual taxpayers.

The initial phase of Making Tax Digital (MTD for VAT), was launched in April 2019. It initially required specific VAT-registered businesses to maintain digital records and use a MTD-compatible software to electronically submit their quarterly VAT returns. Fast Forward to April 2022, when the coverage of MTD for VAT was expanded, requiring all VAT-registered businesses to comply with the regulations unless exempt. Should your business be subject to an insolvency procedure or it is considered not reasonable or practical for you to use computers, software or the internet then you may be eligible to apply for an exemption to MTD for VAT. HM Revenue and Customs have published guidance on applying for exemptions here.

Making Tax Digital for Income Tax is due to be introduced in phases beginning in April 2026 and will eventually affect all self-employed individuals and individuals receiving property income with annual gross income of £30,000 or more. HMRC are still considering to what extent those with annual gross income of between £10,000 and £30,000 will need to comply with the MTD for Income Tax rules. This transition will significantly change the way millions of business owners and landlords will report their earnings to HMRC.

When Does MTD for Landlords Start?

MTD was due to become mandatory for those individuals with income over £10,000 from April 2024, however in December 2022, the UK government announced that they would be delaying the rollout of MTD in order to allow for more time for both businesses and HMRC to get prepared for the introduction of the new programme.

Therefore the time table for mandatory compliance with MTD rules is now as follows:

• From 6 April 2026 for those with gross income of over £50,000
• From 6 April 2027 for those with gross income of between £30,000 and £50,000

The government is yet announce how MTD will apply to General Partnerships and those with income less than £30,000, and from when this group of taxpayers will have to implement MTD into their business practices.

What needs to be done under the new regulations?

Landlords with a combined property and/or business income of £30,000 or more annually will need to follow these regulations starting from April 2027.

The MTD rules state that you must use a ‘Functional Compatible Software’ in order to:

• Maintain digital records of their property and/or business income and expenses.
• Submit quarterly updates of their property and/or business income and expenses to HMRC.
• Finalising their property and/or  income by submitting an End Of Period Statement (EOPS) for each income source, along with a final declaration.

Digital Record Keeping

For digital record-keeping, it’s advised to start as early as possible to make sure there is plenty of time to prepare. HMRC does not provide a compatible software for Making Tax Digital. As such, a MTD-compatible software must be sought from a dedicated third-party provider. HMRC have provided a list of compatible software along with their applicable features here.

The MTD-compatible accounting software will be needed to track:

• All property and business income (e.g. sales invoices), with accurate dates.
• All property and business expenses, (e.g. repairs and maintenance, tenancy advertising fees, etc…), with accurate dates.

Digital record-keeping tools are now available to help landlords from making errors which would otherwise go unnoticed and significantly reduce the time spent on administration. Accounting records must then be held for 5 years 10 months after the accounting period it relates to for self-assessment and 6 years for VAT.

Following the initial introduction of MTD for VAT, The Lloyds Bank UK Consumer Digital Index 2019 highlighted that embracing digital practices resulted in saving a significant amount of time, equivalent to a day a week. Furthermore, HMRC’s research has also shown that individuals who fully integrate their accounting and tax software report spending less time on their tax.

Quarterly Update Submissions

Under the new rules, businesses/landlords will need to send a summary of their business income and expenses to HMRC every three months using their MTD compatible software.

For MTD for Income Tax, The standard quarterly periods and deadlines in each UK tax year are:

Finalising declaration of income

At the end of the tax year, landlords will need to finalise their business income and expenses by completing an End Of Period Statement (EOPS) for each source of income, and a final declaration that replaces the current self-assessment tax return. This process allows them to verify the accuracy of their submitted quarterly updates, add details about personal income or reliefs, and make any necessary adjustments.

HMRC will require a separate EOPS to be submitted for each source of business income. For example, if a taxpayer has income from self-employment and also property rental, they will be required to complete two End of Period Statements, one for each income source.

It’s important to consider that depending on the type and level of income, there could be as many as twenty submissions annually, highlighting the significance of selecting suitable software. However, only one final declaration is required to cover all income sources.

Taxpayers must now submit a Final Declaration, replacing the annual self-assessment tax return, where relief claims and additional income like savings interest, dividends income, and investment gains are declared. This declaration confirms the accuracy of updates sent to HMRC throughout the year and allows for the following:.

• Making accounting adjustments such as accruals and prepayments.
• Facilitating tax adjustments like removing disallowable expenses.
• Claiming reliefs or allowances, such as “rent a room relief” or capital allowances.
• Elections to be made, such as using the trading income allowance for partial relief

Similar to the current self-assessment process, they must submit the EOPS and Final Declaration and pay any owed taxes by January 31 of the following tax year. Late submissions or payments may result in penalties.

Questions?

Landlords who have already signed up to MTD for VAT

Landlords who have previously enrolled in MTD for VAT must also register for MTD for Income Tax. If they earn income from multiple categories, they must be prepared for potential requirements to submit over four updates and multiple EOPS annually.

Those who are already signed up for MTD for VAT are not required to align their obligation periods with those for MTD for Income Tax, but may prefer to as it would simplify their processes.

If properties are held by an incorporated company, and the landlord receives a salary and/or dividends, MTD for Income Tax does not apply to this scenario. Instead salary and dividends from the company should be reported and paid through the standard self-assessment process.

What About Non-Resident Landlords (NRLs)?

Non-Resident Landlords (NRLs) also fall within the scope of MTD regulations. NRLs are individuals or entities who let out property in the UK but reside outside of the country. MTD for NRLs may have unique considerations and obligations, so it’s crucial to understand how these regulations apply to their situation.

Here are some examples of how MTD regulations apply to certain situations for NRLs:

1. Taxation of Rental Income: NRLs are subject to UK taxation on their UK rental income. MTD requires them to keep digital records of their rental income and expenses, just like resident landlords. This means NRLs must adopt digital record-keeping practices, even if they are not physically present in the UK.
2. Double Taxation Agreements (DTAs): NRLs who reside in countries with which the UK has double taxation agreements (DTAs) may have specific tax arrangements in place. These agreements can impact the taxation of rental income and the ability to claim certain exemptions.
3. Tax Deduction at Source: UK law requires tax on rental income to be collected before payment to overseas landlords under the Non-Resident Landlord Scheme. This is an imposed obligation on UK letting agents to withhold tax on the rental income. If there’s no UK letting agent, tenants must withhold tax if their rent to overseas landlords exceeds £100 per week. The withheld tax can be used as a deduction against the NRLs tax liability. NRLs, like resident landlords, must report their rental income and expenses, along with tax withheld at source.

While adapting to a new system may seem challenging initially, the transition to digital tax management is likely to save time, mistakes and money in the long run.

If you’re a landlord, you would like to discuss how we can help you manage all transactions related to your rental properties, access automated bookkeeping services, and keep track of your property tax statement, please feel free to get in touch.