Making Tax Digital: Preparing your agency and your landlords

6 September 2022

Making Tax Digital aims to help businesses and individuals in the UK keep digital records and use software to meet with their HMRC obligations, across VAT, income, and corporation tax.

From 1 November, VAT-registered businesses will only be able to use the Making Tax Digital (MTD) software to complete their VAT returns. Businesses that have not yet set up the right systems will need to ensure they invest time into preparing for this deadline, to ensure they avoid default surcharges and penalties for late submission.

This is one step in the government's ambitious plan to make HMRC "one of the most digitally advanced tax administrations in the world" through Making Tax Digital, affecting VAT returns, income tax, and corporation tax in the UK. Landlords and estate and letting agencies need to be aware of the impact this will have and start to prepare their software systems in line with the latest legislation to stay compliant

1. VAT returns

Making Tax Digital was launched back in April 2019 for VAT-registered businesses with a taxable turnover above the VAT threshold, which stands at £85,000.

Businesses that fall into this category are required to keep digital records and use software to submit their VAT returns. From April 2022, landlords and self-employed sales agents with taxable turnovers below the VAT threshold have also needed to ensure they meet these conditions and have appropriate systems in place.

This online process will become the only option for VAT returns from 1 November 2022.

How will the VAT return process change under Making Tax Digital?

The software relevant landlords and agents use must be able to keep and maintain the records outlined in the regulations, prepare VAT returns using the information in the digital records, and use the API platform to communicate with HMRC.

A full list of relevant MTD software for landlords and agents is available on the government's website. If these systems are in place with up-to-date digital records, the VAT-return information will be automatically collected for the business to validate and confirm submission to HMRC.

Are any businesses exempt from the new regulations?

Businesses or landlords may be exempt from MTD regulation if they can prove to HMRC that it's not "practical" for them to use these digital tools due to age, disability, location, etc, or for religious beliefs that restrict them from keeping electronic records.

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2. Income Tax

Under MTD, landlords and businesses registered for Income Tax Self Assessments (ITSA) and with an annual business or property income above £10,000 will need to follow the MTD rules from 6 April 2024.

Eligible businesses can sign up for the pilot currently underway to get started on turning their ITSAs digital, in advance of the official deadline.

What will change from 6 April 2024 for income tax?

The government guidelines outline the following four things that will take effect from 6 April 2024 for MTD for income tax:

  1. Self Assessment Tax Returns for 2022 to 2023 need to be submitted by 31 January 2024.
  2. HMRC will review the return and check if the qualifying income is more than £10,000.
  3. If the income qualifies, the landlord or business will need to meet the MTD for Income Tax requirements by 6 April 2024.
  4. The landlord or business will need to choose and authorise software compatible with MTD for Income Tax.
  5. The landlord or business will then need to sign up for MTD for Income Tax.

How will income tax need to be submitted under Making Tax Digital rules?

Self-employment and property businesses' income and expenses information should be submitted quarterly through the MTD software, and allowances and adjustments at least once a year at the end of the accounting period. An End of Period Statement with business income sources should also be provided.

With MTD for landlords, if their income comes from more than one source - rent and self-employment for example - it's the combined income which will count towards the £10,000 threshold.

However, if the income is from a jointly owned property, the qualifying income would be based on the share of ownership i.e. half of the income if both parties have equal shares in the rented property.

How long will you have to share each quarterly update?

Once signed up with MTD compatible software, the guidelines share that will add together the digital records, creating totals for the income and expense categories, to help landlords or businesses submit their quarterly updates.

The software will also help users understand when and how to send these updates. The updates will need to be sent within one month after the standard quarterly period has ended.

3. Corporation tax

A consultation for implementing MTD for corporation tax closed in March 2021. As well as applying to estate agencies, landlords operating as a limited company to benefit from corporation tax rather than income tax rates will also be affected and will need to prepare for the digitalisation of their systems.

What will change for corporation tax under Making Tax Digital?

Under the proposals, businesses will need to keep accounting records about the company's transactions, disclose the financial position of the company and prepare its accounts, plus complete a Company Tax Return - all digitally, to capture real time information. The government is expected to mandate any changes by 2026.

This article is intended as a guide only. It is not exhaustive and does not constitute legal advice. For more information, please refer to gov.uk.

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