Making Tax Digital (MTD) & the cash basis (for landlords) – update 03/2017
By Kevin McDaid, Mar 7 2017 01:05PM
Did you know that from 06/04/2017, the way that landlords are to calculate their rental profits is to change?
No, well it is hardly a surprise seeing as HMRC only announced it on 31/01/17 – see https://www.gov.uk/government/publications/calculation-of-profits-of-property-businesses.
I was asked by the Chartered Institute of Taxation [CIOT] Property Taxes Sub-Committee if I would like to comment upon it. Whilst I welcome the changes, on the whole, (as does the CIOT and other bodies such as the RLA) I did highlight a situation where a landlord could find himself paying £1,000 additional tax under the new default basis of accounting where income and expenditure were exactly the same over a 2 year period, compared to if the old default method of accounting had continued to operate.
Now, I know that times are hard in the Exchequer but, I am sure, this is not a deliberate ploy!
The extra tax payable is down to how tax relief will be given for loan interest from April 2017.
Such discrepancies should not happen.
The logic behind replacing the old accruals basis of accounting as the default method for landlords and replacing it with the cash basis means that landlords will only pay tax as and when they receive the rental income and only claim a deduction at the time an expense is incurred. Unsurprisingly, landlords (just like any other taxpayer) find this much easier to understand than the accruals basis.
In simple terms, if you were to pay an annual insurance premium of £600 at the beginning of March 2017, you would claim the full cost in the 2016/17 tax year under the new default cash basis of accounting. Under the outgoing default accruals basis of accounting, as only one month of the premium would relate to 2016/17, only £50 would be claimed as an expense in 2016/17 and the balance (£550) would be claimed in 2017/18 because 11/12th of the premium actually applies to the 2017/18 tax year.
Ultimately, both methods result in a claim for £600 worth of an expense. And assuming income and expenditure remains similar over both years, the amount of tax payable should be very similar. That is, of course, until the loan interest restriction totally distorts the position.
We will have to see how HMRC propose to fix this little anomaly now that it has been brought to their attention.
The change to cash accounting is the forerunner to ‘Making Tax Digital’ (MTD) which will see, all but the smallest of landlords be required to report their rental income and expenditure to HMRC on a quarterly basis from 06/04/2018.
If you would like further details of MTD, please contact us for a fact sheet.
What our clients said about us:
I have a portfolio of over 50 residential properties throughout the North of England.
I first came across Kevin in 2010 when he was performing capital allowances valuations in respect of houses of multiple occupation (HMO). At that point, not many accountants that I spoke to, had much of a clue about the ability to claim the allowances whilst many of those organisations who were in the know, were keen to do the valuations for a hefty fee but then really did not instil me with any confidence about the tax implications.
Kevin was different; we had an initial chat over the phone, there was no big sell and no hefty fee. Because he has a tax and surveying background, not only was he able to undertake the valuations he was able to liaise with my accountant to fully explain the tax implications and talk him through the reporting procedure.
There is no question that the tax savings I made hugely outweighed his fees.
Fast forward 5 years and there is no surprise that, once again, he seems to have a far greater understanding of the latest tax changes than the accountants of other landlords that I regularly speak with.
He has kept me fully updated on the tax implications of the loss of wear and tear and the changes in the allowability of loan interest. He has provided me with an in depth report showing how much post tax income I would have from the present day right through until 20/21 when the restriction is fully in force. It did not paint a pretty picture. In fact, I would go so far as to say, that I would almost certainly no longer be able to continue to operate as a property investor by 20/21 in a sole trader capacity. Consequently, as of 01/04/16, I am now operating as a limited company, Kevin guiding me and my accountant through the tricky incorporation maze and explaining the best profit extraction method going forward.
I would point out that we had been discussing the SDLT implications of incorporation on the run up to the Budget on 16/03/16. With over 50 properties this was going to be a hefty charge for me. We had anticipated there would be a relief for the transfer of more than 15 properties into company ownership. When it was announced in the Budget that this would not apply, Kevin contacted me on Budget day whilst I was in South America to break the news and to push for the transfer to take place by 31/03/16 in order to save an extra 3% SDLT, which I duly did.
Once again, big tax savings for reasonable costs but, most importantly to me, I know exactly where my business is going, how much money I can personally extract from the company & how much should be left in to help pay off existing mortgages or to expand the business.
It really is a no brainer to work with Kevin whether you are a large or small property investor.
We first used the tax services of Kevin almost 10 years ago when he was working for a local firm of chartered accountants. Having received an excellent service from him for a number of years (including expanding from a partnership to a limited company) we were delighted to hear that Kevin had set up on his own and had no hesitation in signing up as a client in 2012. He continues to offer a very personable and cost effective service. We would absolutely recommend him to any other small company like ours.
In addition to our company, we have a small residential property portfolio and were contemplating disposing of one of the properties in 2014/15. Had we not consulted with Kevin prior to the sale, we would have been facing an unwelcome Capital Gains Tax Liability. However, by transferring the property from sole into joint ownership we were able to benefit from a second CGT exemption which saved us almost £2,000’.
Mrs S (Company Director, Bingley)
I first met with Kevin in July 2015 because I was worried that I had been receiving rental income for 3 years but had not declared anything to the tax man. The reason I had not done so was because I had spent quite a bit doing it up when I first purchased it and, by my calculations, I had only just started to make a profit in the tax year ended 05/04/2015.
Kevin explained that not all the expenses would be allowable because some counted as improvements. He provided a fact sheet on ‘Revenue versus Capital’ indicating that those costs that counted as improvements would, ultimately, be available to set against any gains on disposal of the BTL. He also clarified the other expenses I was entitled to claim.
He calculated the net profit from letting. Even though no tax was payable he advised that the income still needed to be reported to HMRC which he duly did via a letter as, he said, the amounts involved were below the level for which a tax return was required. Apparently, this saved me penalties for failing to submit tax returns by the due date.
A tax return will be required for 2015/16 and I will be using Kevin to prepare this as, last year, he took away my concerns in sorting out my tax in a professional manner. He is not expensive and I feel comfortable dealing with him.
I would be happy to recommend him based on my experience.
BLOG INDEX - PLEASE SCROLL DOWN TO VIEW INDIVIDUAL ENTRIES.
How SDLT could change how rented property is owned by couples/civil partners.
CGT Reliefs on homes to be significantly restricted from 04/2020
Mortgage Interest Relief Restrictions - Are you ready?
Making Tax Digital (MTD) & the cash basis for landlords
Landlords lose legal challenge over BTL tax changes
When the sale of a property will be liable to Income Tax rather than CGT
CGT on BTL to be taxed as income - Don't worry, it is not going to happen
The Statutory Residence Test - Working full-time abroad
Replacement Furniture Relief.
How flexible are your pensions savings?