From April this year, landlords with qualifying income above £50,000 have been required to comply with Making Tax Digital (MTD) for income tax.
Instead of completing a traditional annual Self-Assessment tax return, those affected must now keep digital records, submit quarterly updates to HMRC using compatible software and complete an end-of-year declaration. With the first quarterly reporting deadline falling on 7th August, HMRC has described Making Tax Digital as the most significant change to the Self-Assessment regime since its introduction in 1997.
Ahead of the first reporting deadline, we’ve been working closely with Stuart Bell, partner at Dodd & Co Chartered Accountants, to help landlords understand the practical implications of Making Tax Digital. His experience of supporting clients through the transition has provided valuable insight into how landlords are adapting to the new reporting requirements.
Looking beyond compliance
The first challenge is simply understanding who the new rules apply to. Stuart told me, “Many landlords remain unaware that they are within scope, particularly those who do not view themselves as running a business and simply own one or two rental properties alongside self-employment income. Many landlords are often surprised to discover that the threshold is based on gross rental income rather than profit.”
That brings more landlords within the scope of the rules than many might expect. A landlord with significant mortgage interest, repairs and management costs may still need to comply, even if their taxable profit appears relatively modest. Understanding those rules is naturally the first priority. Once landlords know what is expected of them, attention can turn to the effect Making Tax Digital may have on the day-to-day running of their business.
Quarterly reporting changes more than the way information is submitted to HMRC. It encourages landlords to engage with their finances throughout the year, creating a clearer understanding of performance and, ultimately, better-informed business decisions.
Better information leads to better decisions
For many landlords, financial reviews have traditionally taken place once a year when tax returns were prepared or a mortgage was due for renewal. Making Tax Digital changes that rhythm by encouraging landlords to keep their financial information current throughout the year.
As Stuart explains, “The MTD reporting requirements are an initial adjustment for landlords, but I think over time, once systems are in place and submissions are part of a regular routine, it will be a positive as it will allow them to have up-to-date digital financial records for their properties. It may also encourage landlords to take a more proactive approach to monitoring profitability and cashflow rather than reviewing performance once a year, when their tax return is prepared.”
That reflects HMRC’s own ambitions for the new system, which include supporting better record keeping, improved cashflow planning and greater visibility of tax liabilities throughout the year. Having access to current financial information also allows landlords to identify rising costs, monitor rental performance and make investment decisions while there is still time to respond.
Different landlords, different starting points
Not every landlord is approaching Making Tax Digital from the same position, though. Stuart believes those already using digital accounting systems are likely to adapt far more quickly than those relying on annual bookkeeping.
As he puts it, “The landlords with multi-properties who already use an accounting system to track their portfolio will be prepared without realising they’re prepared. However, the vast majority of landlords, particularly those who have been pulled into this already due to their other qualifying income, are more than likely not prepared.”
Ironically, those landlords could see some of the biggest long-term benefits. Once digital records become part of everyday administration, landlords can monitor performance on a property-by-property basis and develop a much clearer understanding of how each asset is performing across the year.
Better records, better lending conversations
From our perspective at The Cumberland, the real benefit will be seen when we have review discussions with our landlord customers. In my view, with the majority of landlords maintaining digital records throughout the year they will be in a great place to explore opportunities to refinance, expand or invest at speed. The live, up to date, performance data, will allow us to support customers with future projects and also accelerate lending decisions.
Stuart sees that as a practical advantage rather than simply an administrative one. “It is encouraging landlords to keep real-time records of their rents and related expenditure, which will allow lenders to have an up-to-date picture as and when required. If additional lending is ever required for refurbishments or extensions, the lender is highly likely to request current financials rather than the last recorded set of accounts, which could be 18 months out of date.”
For landlords looking to refinance, expand or improve their portfolios, having reliable financial information readily available should make those discussions more straightforward. UK Finance has also suggested that, over time, the move towards digital reporting should improve the quality and transparency of financial information across the sector.
Making Tax Digital may have been introduced as a change to tax reporting, but its biggest impact could be on the way landlords manage their businesses. Those who embrace it as more than a compliance exercise may find they are better placed to make informed decisions, whatever comes next.
