Making Digital Tax: How does it affect landlords?


With HMRC issuing more detail on Making Tax Digital in August 2016, how will the changes affect landlords?

HMRC are considering introducing an optional cash basis accounting scheme to landlords to give them the choice to use the simplified accounting method.

What is changing?

Currently property businesses are required to follow the accountancy rules set out by Generally Accepted Accounting Practice (GAAP) that recognise income earned and expenses incurred in the period, whether or not the amounts have actually been received or paid.

This can be a problem for landlords as many tenants often pay rent in arrears, therefore the plan is to give landlords the option to use cash basis accounting.

This method of calculating tax works on a cash in cash out basis. This means tax is only accounted for on income when it is received and expenditure when it has been paid.

Why is it changing?

The introduction of cash basis accounting will ease the transition to Making Tax Digital for landlords who will be required to report at least quarterly.

Cash accounting will simplify the tax rules for unincorporated property businesses due to less administration and accounting adjustments.

The government wants to build on the success of cash accounting with trading businesses, currently used by over 1.1 million businesses.

Landlords will have more certainty over their cash flows.

Who does it affect?

Over 2.5 million property businesses, both individuals and partnerships of individuals with unincorporated property businesses, as well as their agents and representative bodies.

It is designed with the simplest property businesses in mind – those with small numbers of properties or another main source of income.

Landlords with income below £10,000 will not be mandated to keep their business records digitally or provide quarterly updates to HMRC.

What is the impact?

  • Expected to generate an initial transition yield to the Exchequer in the region of £25 million due to earlier payment of some tax.
  • Expected to make it easier and cheaper for unincorporated property businesses to calculate tax liabilities.
  • Some individuals switching to use cash basis are likely to incur a small one-off timing cost due to rent being paid in advance of when it is due. Howeve,r taxable profits should be broadly the same using both the accruals accounting and cash basis method.

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Any questions?

If you’d like a meeting or a Skype call with a Liverpool accountant to discuss this, please give us a ring on 0151 380 3800 or drop us an email at [email protected].

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Added by Jon Davies
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