The Office of Tax Simplification calls for landlord deferral on Making Tax Digital

In its property income review, released on 1 November, the Office of Tax Simplification (OTS) makes some strong recommendations to improve aspects of Making Tax Digital for income tax self assessment (MTD ITSA) that affect residential landlords.

The MTD ITSA regulations will require sole traders and individual landlords to start keeping digital records and file quarterly reports from 6 April 2024, subject to the £10,000 turnover threshold.

Small general partnerships are scheduled to join the MTD ITSA regime from 6 April 2025, but there is no joining date yet for limited liability partnerships (LLPs), large partnerships (over 20 partners) or mixed partnerships with corporate members. The OTS candidly notes that it has been told there may be no benefit in introducing MTD for such large businesses.

Raise the threshold

A landlord with gross rents just exceeding £10,000 per year will be drawn into MTD ITSA. At this level, the landlord is likely to keep paper records or a simple spreadsheet and have just one property. The OTS argues that the cost of complying with MTD ITSA will be disproportionate for the business needs.

The OTS has not put forward an alternative MTD entry threshold. Other tax advisers suggest that a turnover of £85,000 per year would be a reasonable level to start. HMRC has specified in the draft notices that level taxpayers with turnover up to £85,000 can report “three-line accounts”. This, as the OTS notes, seems to indicate limited value of the data to HMRC.

Once the MTD system is established for income tax the entry threshold could be reduced, as has been for MTD VAT.

Jointly held properties

HMRC data indicates 1.5m landlords own their let property jointly, which is nearly half of all individual landlords.

Each landlord will be required to keep their own digital records of their share of the income and expenses from the property. Where the joint owners are spouses, this record-keeping obligation may not cause many problems.

However, where the joint owners are not living together, this division of each cost and income figure into the fractions to be recorded and then reported by the joint owners will just create unnecessary duplication and increase the risk of errors being introduced.

When reporting under self-assessment a joint landlord can provide HMRC with the name and address of the record keeper for the property business. Where the taxpayer is not the record keeper, HMRC guidance (property income notes: box 3) indicates that the taxpayer does not have to report full details.

The OTS suggests that this structure should be retained for MTD, so there is a single set of underlying records. Also, the jointly owned property should be the filing entity as is envisaged for partnerships, which have been granted an extra year to prepare for MTD.

HMRC expects software developers to create products for joint owners of let properties, which will allow them to share the digital records and make MTD submissions for each owner. Currently six of the nine software products ready to file for MTD ITSA say they can file property updates, but it isn’t clear how many of those products cope with joint owners.

Multiple agents

Letting agents will be able to make the quarterly reports under MTD on behalf of their clients, but to do so the MTD system will have to allow a single taxpayer to have at least two agents to report on their behalf: the property agent and the tax agent.

The OTS notes that HMRC has been aware of the need to accommodate multiple agents for more than a decade, but nothing has happened to move towards that position. At present the agent services account (ASA) is built around the concept that the taxpayer has a single agent to deal with all the various HMRC services, including MTD ITSA.

The MTD ITSA rules could be tweaked to allow a new concept of filing agent and record-keeping agent. The OTS is in favour of this, but notes that clear guidance and specific agent standards will be needed to cover the responsibilities of each agent.

In-year decisions

All UK property income is reported together, with adjustments made on the end of period statement (EOPS) for furnished holiday letting deductions if necessary. Similarly, all overseas property income is reported together, not property by property.

However, the data requirements for furnished holiday lettings (FHL) are slightly different, as FHL owners can claim relief for interest payments and capital allowances. Where the taxpayer reports quarterly on the assumption that the property will meet the FHL letting conditions, but at the end of the year it hasn’t, there is no clarity on how or when the records would have to be corrected.

A similar problem exists with the cash basis, which can only be used if the total rental income for the year does not exceed £150,000. Where rents exceed that level the accruals basis must be used.

Other allowances

All income from land, including wayleaves, must be reported under MTD ITSA. Where the wayleaves are less than £1,000 per year that income would be covered by the property income allowance.

This allowance will need to be claimed in the EOPS, but exactly how that will work is not yet clear.

Non-resident landlords

Landlords who live outside of the UK face extreme problems when attempting to file online. If the landlord doesn’t have a UK national insurance number or other UK ID documents such as a passport, it is almost impossible to set up a government gateway account.

These landlords will have to either appoint an agent to deal with the whole MTD ITSA process, or claim an exemption on the basis that they are digitally excluded.

The OTS recommends that the government gateway process is made easier for non-UK residents to obtain the relevant ID and password and manage their affairs online.

Letting agents for non-resident landlords currently have to report the tax deducted quarterly under the non-resident landlord scheme (NRLS), and make an annual return (NRLY).

HMRC has not clarified how the NRLS reports will fit in with the quarterly and annual MTD reporting.

Lack of guidance

In early August 2022 HMRC confirmed that it planned to publish MTD ITSA guidance within three months. By the end of that month we had some guidance, but in my view it was not in line with the MTD regulations.

The OTS appears to be of the same view as it says: “The current guidance is limited and contains inconsistencies.” It recommends that HMRC should publish comprehensive detailed guidance on the practicalities of MTD for taxpayers and agents, in good time before the implementation deadline.

Defer for landlords

Taking into account all of the above, the OTS recommends that MTD ITSA should not apply to landlords until these major points have been dealt with by HMRC and by a range of software providers.

It warns: “Time will be needed to test new systems before adoption.”

Will it happen?

So will HMRC take on board these recommendations? The Autumn Statement on 17 November or around that date would provide the tax department with an opportunity if it was going to make an announcement regarding MTD ITSA.

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