Landlords with an annual business or property income of over £10,000 will be required to submit quarterly tax assessments, in addition to a comprehensive annual tax return. This means that, instead of filing just one annual tax return, landlords will have up to five deadlines to hit throughout the year.
At a first glance, the impact of this change will be increased admin, together with the pressure of additional deadlines. There is more to it, however, as MTD for ITSA also presents an opportunity for landlords to develop a stronger understanding of their property finances.
What is MTD for ITSA?
To understand how to see the positive in this, we first need to understand what changes are being made, and why.
MTD for ITSA is an initiative introduced by the UK government to replace the current annual self-assessment submissions for landlords and sole traders. In essence, quarterly updates will be required to provide estimates of the total amount of tax due at the end of the year, with final tax payments to be made on an annual basis.
To facilitate these quarterly submissions, the legislation requires the use of compatible software which means that landlords currently relying on spreadsheets, paper invoices, receipts and other manual processes to manage their property finances, will need to transition to a digital solution.
The details of the new requirements for landlords are set out in full in the Income Tax (Digital Requirements) Regulations 2021.
Why are the changes being made now?
HMRC are introducing MTD for ITSA with the view to improving the way in which sole traders and landlords manage their finances. Keeping digital records and having to submit figures on a more regular basis will provide greater visibility – and therefore control – of finances, avoiding any surprises with the tax bill.
Preparation is key
With just over 18 months until the deadline, it’s time to put the preparations in place.
If an accountancy firm helps you manage your finances, ask them what changes they are planning to make ahead of the deadline. At this point, they should be advising on any changes to the way you share the record of your property transactions, invoices and receipts. If new software is required, it may be best to start using it sooner rather than later.
If you manage your finances by yourself, now is the time to ensure that your spreadsheets and filing systems are in order.
Whether you engage an accountancy firm or not, it’s important that you identify and become familiar with a system that works for you. Ideally, you should aim for a system that makes it easy to search, filter and categorise income and expenses, giving you real-time visibility of your property finances.
Pro tip: use a dedicated bank account for your property transactions to avoid muddying the waters between those and your personal affairs, removing the need to filter through and decipher long lists of incomings and outgoings.
Getting ahead of the game
Making last-minute changes ahead of a deadline is rarely a good idea, especially when it comes to tax regulation. It may cause higher stress levels and consequential mistakes which can result in missed deadlines and subsequent financial penalties.
By preparing for the changes ahead of the deadline, you will give yourself the best chance to familiarise yourself with what is required of you, how you are going to deliver it, and when.
Being organised will also give you immediate benefits, minimising the overall time you spend preparing and filing tax returns, and freeing up valuable time to spend on other, more forward-thinking tasks to build and grow your property portfolio.
Better understanding of property cashflow
MTD for ITSA should be looked upon as an opportunity for landlords to develop a deeper understanding of their property finances. Whilst, undoubtedly, MTD may simply seem like a requirement for more paperwork and admin, in the near future it may prove to be the key for landlords to unlock a better awareness of their cashflow and more active management of their rental income.
Getting rid of spreadsheets and paper notes will help you focus on tracking the key metrics of your property investments (like rental yields and loan-to-value ratios) and on making smarter and more timely business decisions (renew your mortgage, buy or sell properties, invest in upgrades of your existing properties), leaving the admin grunt work to the software.
