Making Tax Digital for Income Tax Self-Assessment: An Opportunity, Not a Threat
Owners with an annual business or property income of over £10,000 will be required to submit quarterly tax assessments, in addition to a full annual tax return. This means that instead of filing a single annual tax return, owners will have up to five deadlines to meet throughout the year.
At first glance, the impact of this change will be an increase in administration, as well as the pressure of additional deadlines. However, there is more to it, as MTD for ITSA also offers owners an opportunity to develop a better understanding of their real estate finances.
What is BAT for ITSA?
To understand how to see the positive in this, we must first understand what changes are being made and why.
MTD for ITSA is an initiative launched by the UK Government to replace the current annual self-assessment submissions for owners and independent traders. Essentially, quarterly updates will be required to provide estimates of the total amount of tax due at the end of the year, with final tax payments to be made on an annual basis.
To facilitate these quarterly submissions, legislation requires the use of compatible software, which means landlords who currently rely on spreadsheets, paper invoices, receipts and other manual processes to manage their real estate finances will have to move to a digital solution.
Details of the new requirements for owners are set out in full in the Income Tax (Numerical Requirements) Regulations 2021.
Why are the changes being made now?
HMRC introduces MTD for ITSA to improve the way sole traders and owners manage their finances. Keeping digital records and requiring figures to be provided on a more regular basis will provide greater visibility – and therefore control – of finances, avoiding any surprises with the tax bill.
Preparation is key
With just over 18 months until the deadline, it’s time to put the preparations in place.
If an accounting firm helps you manage your finances, ask them what changes they plan to make before the deadline. At this point, they should let you know of any changes to how you share your real estate transactions, bills, and receipts record. If new software is required, it may be best to start using it as soon as possible.
If you manage your finances yourself, now is the time to make sure your spreadsheets and filing systems are in order.
Whether you use an accounting firm or not, it is important that you identify and become familiar with a system that works for you. Ideally, you should aim for a system that makes it easy to find, filter, and categorize income and expenses, giving you real-time visibility into your property’s finances.
Pro tip: Use a dedicated bank account for your real estate transactions to avoid blurring the lines between them and your personal affairs, by removing the need to filter and decipher long lists of entries and exits.
Get ahead of the game
Making last-minute changes before a deadline is rarely a good idea, especially when it comes to tax regulations. This can lead to higher stress levels and consequential errors which can lead to missed deadlines and subsequent financial penalties.
By preparing for the changes before the deadline, you will give yourself the best chance to familiarize yourself with what is expected of you, how you will deliver it and when.
Being organized will also bring you immediate benefits, minimizing the overall time you spend preparing and filing tax returns, and freeing up valuable time to devote to other more forward-thinking tasks to build and grow your portfolio. immovable.
Better understanding of real estate cash flow
MTD for ITSA should be seen as an opportunity for owners to develop a deeper understanding of their real estate finances. While, no doubt, MTD may just seem like a requirement for more paperwork and administration, in the near future it could turn out to be the key for owners to unlock better cash flow awareness and management. more active in their rental income.
Eliminating spreadsheets and paper notes will help you focus on tracking key metrics of your real estate investments (like rental yields and loan-to-value ratios) and make smarter, more timely business decisions ( renew your mortgage, buy or sell properties, invest in upgrading your existing properties), leaving the administration work to the software.