The combination of Making Tax Digital (MTD) and Income Tax Self Assessment (ITSA) and the requirements it places on Landlords has once again brought the subject of incorporating your property portfolio to the fore.

When MTD for VAT was introduced, we were given a long lead time before it came into force, but there was still a big disruption and many businesses were unsure about what was needed and the benefits it could give them.

With the introduction of MTD for ITSA, the impact on everyone is going to be significant but many Landlords in particular will be impacted. MTD for ITSA is sure to come as a shock to many individuals that privately own rental property as income from furnished holiday lettings (FHL), commercial property and non-UK properties is included too.

For those people who have inherited a single property they offer for rent may not even be aware that, in the eyes of HMRC, they’re running a business—and that MTD for ITSA may apply to them.

Many smaller landlords tend to keep basic accounting records, if they keep any at all. Some may not even declare their income, while others may not correctly understand how property rental income is taxed.

Speaking in an AccountingWeb webinar, tax expert Rebecca Bennyworth said:

“Landlords are quite interesting, particularly unrepresented landlords because there was probably a lot of very inaccurate information going on tax returns. This could include putting all mortgage payments rather than just the interest through, or other nuances that unrepresented landlords don’t understand, she added.”

Whilst there are a lot of changes taking place, a recent report from SAGE explained all the changes and summarised them well.

For those within its scope, the rules of MTD for ITSA are as follows:

• Software compatible with MTD for ITSA must be used for accounting, relating to income tax. Accounting records relating to income tax must be held digitally (e.g. invoice and expenses data), and kept for the required period after the tax year ends (currently up to six years).
• The company/individual must register for MTD for ITSA before 6 April 2023. If you are already registered for Self Assessment, or have already registered for MTD for VAT, you will not be transferred across automatically when MTD for ITSA begins. Furthermore, you may need help from your accountants to link your accounting software to theirs, and you may need to manually activate MTD functionality in the software.
• You will no longer need to send a Self Assessment return for income tax, although one might still be needed in some cases to report other kinds of income outside the scope of MTD for ITSA. This will need to be submitted in addition to fulfilling your requirements that arise from MTD for ITSA.
• You must provide HMRC with quarterly updates using software that details all property income (any sole trader business will also require a quarterly update of its own). Updates more frequent than quarterly can be submitted if it helps you. There’s no legal requirement for the updates to be accurate but doing so will help you see your tax and National Insurance liability. Your accountants can then apply adjustments and reliefs as required at this stage.
• By 31 January following the end of the tax year, you must use software to provide HMRC with an end of period statement (EOPS). This will detail all your property income and allowable expenses. If you own a sole trader business (or businesses) then you will also need to submit an EOPS for each. These should follow the end of the accounting period for that business, but all EOPS should be submitted by 31 January at the latest.
• By 31 January following the end of the tax year, you must use software to provide HMRC with a signed final declaration of all your income. If you have any income from a sole trader business, then this will need to be included too. Adjustments and reliefs can again be applied by your accountant.
• By 31 January, you will need to pay the balance of any tax and National Insurance contributions due. The payment on account system will continue, so you may need to make a further payment on 31 July of the same year.

Whilst this process may seem complex, with the right systems it is straight forward and is something we can easily help you with.

The whole process of MTD for ITSA raises the question of incorporating your property portfolio into a limited company. If you do this, the MTD requirements will not be applicable and will enable you to be more tax efficient managing your properties.

To find out more about MTD for ITSA, or how to incorporate a property portfolio contact us or call David White on 020 8863 4566.