Everything Landlords Need To Know About Making Tax Digital

In a recent announcement, the HMRC moved the implementation of MTD back from 2024 to 2026.

Key Takeaways

Landlords earning above the income threshold of £50,000 per year (before expenses) will need to be MTD compliant by April 6 2026.
MTD offers a great opportunity for small portfolio landlords to improve the professional operations of teh property business.
Treating your buy-to-lets as a business is not just about compliance. Gain insights into cash flow, and make better more educated financial decisions and plans for the future.
Adopting a software will help you get your data into an easy to understand format so that you can actually use it to grow your business.

Listen to the Full Episode on Making Tax Digital here

Or read the edited transcript below.

Making Tax Digital | My property World Podcast

The panel lineup:

Christine Janaway, a highly experienced expert in both residential leasehold and commercial dealings and we’re going to be tapping into her knowledge and experience in relation to Making Tax Digital which is the topic of today’s show.

Logan Ransley, one of the Co-Founders of Landlord Studio. Who has some comments about what’s going on and the process for making tax digital and landlord studio forces a tool to make it easy for landlords to do the administration around, I suppose the business side of being a landlord.

Ron Bannerjee, one of the principals at Banner Associates, a North London-based accountancy firm. Not only is he got a large landlord client base as an accountant, but he’s also a landlord himself.

Will Mallard

Let’s kick off the discussion firstly with you, Logan. Could you share some feedback that you’ve got from social media posts about what’s going on in the world of Making Tax Digital?

Logan Ransley

Yeah, for sure. So this is quite interesting because we started creating some educational resources around Making Tax Digital and this was before they pushed out the dates several times.

What we’ve found is that there are a lot of comments and almost misinformation in the industry around what Making Tax Digital is, why it’s being implemented, how it works, and how to stay compliant.

I guess, as a summary, what we found is a lot of these users are finding information from various sources on the Internet. Not necessarily directly from an accountant or a tax professional, particularly. And we had all sorts of feedback around people wanting to use spreadsheets and people not needing to go on digital software or not needing to change the way they operate their current business and some questions and feedback around the revenue threshold or income threshold that they needed to meet before they could or come under this MTD changes.

There are various different comments that we found, particularly from some of the social posts that we were creating. And I guess what I was quite keen to get is a bit more understanding from Juran and the audience today, or the panel members about debunking some of these myths and getting some actual proper knowledge and proper advice around these around a specific topic.

Ron Bannerjee

Yeah, so I think our experience with respect to Making Tax Digital is what we call MTD ITSA. Which is Making Tax Digital for income tax self-assessment.

Honestly, I think the first point to make is that, like with the first iteration of Making Tax Digital, which was centred on VAT registered businesses above the VAT threshold, there seems to be a serious lack of any kind of communication coming out from governments about it.

That’s the case now. Making Tax Digital is a big programme for the government, with far-reaching implications, I can bore you with the raison d’etre for it. etc. But I think the real crux of the matter is that it’s coming. It has been pushed back from 2023 and it’s coming in April 2024. And landlords now need to really start getting their ducks in a row about it.

Note that MTD for ITSA has now been delayed again until April 2026.

With what Logan was talking about, we haven’t seen a hell of a lot of noise being made about it. Some of the software providers are making a rumble because it’s an opportunity for them to sell software to a new market. But at the end of the day, I think that, regardless of the lack of communication, it’s coming, and it’s a case of let’s get ready for it. And as an accountant, we’re really focusing now on educating our clients.

I’m a glass half full kind of fella. And I think the good thing about this change, as is personified in Landlord Studio, is that it’s an opportunity for people to really get to grips and understand their property business. They can get all their data in a format and in a place where they can actually do something with it.

It’s not just about compliance, but also about knowing how much profit you’re making, how much tax you’ve got, how much is left over for you to spend or reinvest, and what your opportunities are for remortgaging and further expansion of your portfolio.

In the age of data, you know, the more data the better and this is an opportunity for us, as landlords to get data about our property portfolio in a nicer, easier to understand format. We’re simplifying and making it more efficient with software like Landlord Studio and others.

Will Mallard

Ultimately, what the government has explicitly come out and said their agenda is for the people who are owning homes to operate in a compliant and professional manner.

Within the property industry there are a huge number of what are effectively regarded as amateur landlords, often termed accidental landlords. These are individuals with two or three properties and when they look at their investments they don’t see it as a real business, and so they’re not operating it professionally. In the end, this can potentially be dangerous, both in terms of tax compliance and within the physical asset.

Now, Christine, we’re going to get your view on this, you’ve run real estate organisations that have had up to several hundred branches across the UK, your director with large institutions, what’s your view on all of this?

Christine Janaway

My broader view, is the government have been trying for quite a number of years now to force out what you might term small portfolio landlords. Making Tax Digital is another nail in the coffin.

I have management agencies that I own across the north Cotswolds and I know a lot of my clients don’t know about these upcoming changes, they don’t know about MTD, and when they hear about it they’re like rabbits in the headlights, and quite honestly I think they feel victimised. Often don’t really understand why the change is being made, and they think it’s literally like Big Brother. Why is the government wanting to know everything that they do?

Actually, though, and this is what I tell them, it’s about getting everything on a professional footing. It makes their life so much easier, and so much more straightforward, and it protects them in so many ways.

I think there’s going to be a lot of resistance, especially from landlords with smaller portfolios. But if we can guide them over that hump, I think on the other side, they will find their lives much easier, more straightforward and less scary.

Ron Bannerjee

I agree. I think there are a lot of landlords that are hesitant. Every single time there’s something which we have to do people always take umbrage at it at first.

They are wondering, why do I have to do this? Why do I have to share all this data, all this information with the government? And often they can’t be bothered to make the change.

The point though is, the government’s doing this, and people need to prepare.

I definitely agree with you, Christine. I think the government’s doing this to dissuade people from owning more than one house. They don’t like that idea at all. So, the small portfolio landlords, are being dissuaded.

Christine Janaway

One thing that small portfolio landlords often cannot get their heads around is all the regulations, there are over 170 pieces of legislation. Even simple things like what you can actually ask the tenant when you’re qualifying them is a minefield quite honestly.

Ron Bannerjee

There’s a massive gap between what people think owning property is like, and the reality which is that it’s a business with all the regulation you’d expect – and more because, at the end of the day, you’re providing a roof over someone’s head which is a big deal.

But this is, I think, something the small portfolio landlord sometimes doesn’t understand. I mean, as you well know, some of them don’t even have a separate bank account for it.

The first stage in the education process, for us, is that they need to have a separate bank account. The second step is to make them understand that it’s a business, and needs to be run like one.

Making Tax Digital is really forcing this change – and we’re continuing to see a lot of pushback. Because at the end of the day, from their perspective it’s rubbish that the government’s doing this. They wonder why the government wants more information, and it’s going to cost them money as well. They’re going to have to engage professionals, they might have to pay for some software. Plus, they’re being asked to change their behaviour which is fundamentally one of the hardest things we as humans find to do.

But, at the end of the day, it’s actually going to benefit them and their business.

Will Mallard

One of the classic examples is if you think about people who operate in the cash economy. You can think of a tradesperson dealing cash and it’s under the radar of the tax authorities. From their perspective, they think this is a great thing. But then you start thinking about when you don’t have declared income, what’s your ability to leverage that? What’s your ability to approach financial bodies and get a mortgage. They see what seems a significant chunk of their income going to taxes, but this pales into insignificance in terms of the implications about what you’re able to do and the value of that proven cash flow or income.

Now, at a very basic level Logan what do we actually mean by digital records? I know I know. We’re half an hour into the channel. We haven’t said what is let’s actually talk.

Logan Ransley

Digital records basically mean rather than keeping everything in physical receipts and your accounts in a paper format, you need to keep it in a digital form that can be traced and ultimately, in the context of this conversation, transferred over to the HMRC. This will require some sort of software or bridging software that can then help the landlord file their tax return with the HMRC. Does that agree with your understanding, Ron?

Ron Bannerjee

Absolutely. The vague definition for Making Tax Digital is that there should be a digital link between the numbers that are filed with HMRC. A digital link is some kind of evidence behind each transaction. Now that evidence can be in the form of a bank statement, which has the transaction on it digitally presented. By digitally presented, what I mean is a direct download or connection to the HMRC, this is where open banking has been really useful.

Just remember that keeping a copy of the receipt is still important as the receipt is the actual proof that you own that service.

Will Mallard

What about properties held in partnerships are there any changes to how people will need to report their income under MTD?

Ron Bannerjee

I think that this comes back to what you were saying before about it being a business. If the partnership is treated as a business, then there’d be a partnership agreement, there’d be a separate bank for each partner and each partner can accurately track their tax liability.

I think the way that HMRC approaches these things you can cut the pie in whichever way you want, but at the end of the day, the pie is still the pie. You’re operating a business, you need to keep records, whether it’s in the guise of a partnership, an LLP, if you’re doing it in your own name, or limited company.

From the HMRC’s perspective, they don’t care that your partnership might be a bit more difficult to do report on.

Will Mallard

What are the penalties involved for people who don’t manage to adapt to the new MTD system in time?

Ron Bannerjee

The HMRC has a year one policy where there are never any penalties. MTD is being implemented from the sixth of April 2024. From there until the end of that tax year on the fifth of April 2025. There will probably be no penalties, no interest, nothing. Just a letter saying you’ve got it wrong, get it right next time.

That’s how it’s usually done with HMRC. I only caveat myself by saying that they might change that, they’re really trying to get people enrolled now in various pilot programmes. If they succeed, they’ve probably got some KPIs and some metrics, they might rescind the no penalties in year one policy.

Will Mallard

A huge portion of people think about their property as being their pension. And some people have been smart enough to actually use the asset as their pension fund. All of this falls under HMRC’s directives. Going digital, in my mind, with good software, is a no brainer it’ll help you make good decisions and get better advice.

Ron Bannerjee

So the first thing is you have got to do is accept the new system. Once you do this you can start planning. You will have a running tally of your upcoming tax bills. This will allow you to plan financially. And you can use that data to get better advice from your accountant and plan long term.

Obviously, I’m being quite positive about this, but you can’t approach this change in a doom and gloom kind of way. If you’re doing this it may be time or an opportunity to exit and realise your equity or realise your capital gains.

Christine Janaway

This is, I think, one of the reasons some of the smaller portfolio clients in our business are so nervous. They’re wondering what’s happening about all this is because they haven’t actually done any proper tax planning in the past or long term planning, they haven’t had the systems and been able to.

The first step for them is to speak to somebody who really knows what they’re talking about in terms of pensions and whether you should hold your properties in a limited company or your own name. Things like this – which depend on your personal circumstances – they need to get this sorted out.

By removing spreadsheets and manual data entry the outcome of that is that, as you say, you get all this extra really valuable information about your portfolio, your upcoming liabilities, and the returns on your investment, stuff that you would normally have to crunch numbers for hours to uncover.

Will Mallard

I think of it a bit like getting on your car not knowing what the level of petrol is, not knowing what speed you’re travelling at, not knowing what the future of the engine was, and blindly wondering what might go wrong.

Logan, a question for you, what can you tell us about approved software and the role of software with this future change in mind?

Logan Ransley

I actually want to tell you a little story about one of our customers. It goes back to understanding the finances of the business and why that’s so important. We had a guy who was basically managing everything on spreadsheets. He had 15 properties, using various different spreadsheets, and it was about time he transferred into a new software because he was getting to that stage where it was becoming unmanageable, and of course, his accountant kept pestering him to do it.

Once he had loaded all his information into Landlord Studio he started running reports and he noticed that he was not making nearly as much money as he thought he was, and only making something like £5 pounds per month in profit for one of them. He was almost losing money on his investments and hadn’t realised at all because he’d been unable to properly crunch the numbers.

It just goes to emphasise that point of how important it is to know your numbers, especially when running a property business, and how important it is to use the available tools in order to do it properly and efficiently.

In terms of Making Tax Digital, and we are in the process of developing our product to be compliant. There are a number of ways to become an approved software, you can either do it through a third-party integration with the likes of Xero or Sage or QuickBooks, you can do it by directly connecting with the HMRC’s API, or you can create reports that allow the data to be exported in a particular format so that users can then use bridging software to file their tax returns.

What we’re doing right now is looking at that all the different options and what is best for our users. We’re looking at integrating into accounting software in Q1 of next year. But essentially what we do now, is allow users to digitise everything. They can import bank transactions to view and reconcile transactions against properties. Overall, making our user’s businesses much more organised as well as helps them achieve financial oversight and plan for the future to achieve their long-term financial goals.