The pilot scheme for Making Tax Digital (MTD) for income tax is now open for self-employed workers and landlords. The scheme becomes mandatory for accounting periods commencing on or after 6 April 2023, so those who join now will get ahead of the game.
The first phase of MTD for income tax will be mandatory if your taxable turnover from self-employment or income from property is above £10,000. If you want to be one of the early adopters in the pilot scheme, there are various conditions that you will need to meet.
Who can join?
You can only join if you are a sole trader with income from just one business, a landlord renting out UK property, or both. If you need to report income from other sources, such as employment, pensions, or capital gains, then you cannot currently join. The other conditions should not be a problem for most:
McManus Hall chartered accountants can sign you up if you make a request.
To join the pilot, you will need to use software that is compatible with MTD for income tax. Be warned that only five fully compatible products covering both self-employment and property are currently listed by HMRC, although this includes two with free versions.
You’ll need to keep digital records of all your business income and expenses, starting from the beginning of the accounting period you sign up for, and send updates to HMRC. At the end of the period, you will submit a final declaration instead of a self-assessment tax return.
If you’re already using software to keep records, you should almost certainly wait for your provider to update their product to be compatible with MTD for income tax rather than switching providers just to join the pilot scheme. HMRC’s list of software compatible with MTD for income tax can be found here.
The bounce back loan scheme (BBLS) has kept many businesses afloat over the past year, but, with the first repayments now starting to become due, many of the 1.5 million businesses that borrowed money could fall into difficulty.
The BBLS was launched in May 2020, with no interest charged or repayments required for the first twelve months. Bounce back loans are repayable over five years, so 1/60th of the capital is repaid each month, plus the interest accrued for that month, at a fixed annual interest rate of 2.5%. Repayments will therefore reduce over the term of loan as capital is repaid. The first repayment on a £20,000 loan, for example, will be £375.00 (£333.33 capital plus £41.67 interest).
Although loans are guaranteed by the government, banks will be under pressure to recover cash without triggering guarantees. However, since lenders were not permitted to require personal guarantees, even unincorporated businesses are not at risk of having their home or car seized.
There are various measures that you can take if repaying a BBL is going to cause difficulty:
There are various tax advantages to a rental property being treated as a furnished holiday letting, but inheritance tax (IHT) business relief is generally not one of them. Even though the law supports HMRC’s view, property owners regularly appeal against their refusal to give relief.
The tax advantages
The most immediate benefit is full tax relief for finance costs. For normal rentals, relief is restricted to the basic rate, so a higher-rate taxpayer with a £250,000 mortgage at an interest rate of 2.5% will receive extra tax relief of £1,250 annually.
When it comes to disposing of a property, business asset disposal relief and holdover relief will be available.
Some £225,000 in IHT was at stake in the recent appeal by the executors appointed by Sheriff Graham Loudon Cox against business relief being denied. Although the late taxpayer worked hard to ensure guests enjoyed their stay in his three furnished holiday flats, the First Tier Tribunal dismissed the appeal, finding that there was nothing exceptional about the business to elevate it beyond being one of mainly investment.
And that is the essential problem. The level of additional services provided must be sufficient that the activity is considered as non-investment. This needs to be more than just:
Details about the reliefs available for furnished holiday lettings, and the qualifying conditions, can be found here.