Digital tax will cost landlords time and money in 2020

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How will this change affect landlords?

Following the delay to the implementation of HMRC’s Making Tax Digital system, TheHouseShop.com have decided to investigate how much time and money this plan will cost landlords once it is implemented.

By 2020, most businesses, self-employed people and landlords, will be expected to submit quarterly self-assessment tax returns digitally to HMRC. 

It will start with Income Tax in 2018 for businesses which will include landlords with an annual turnover above the VAT threshold of £83,000, and then subsequently it will roll out to all businesses, self-employed people and landlords with an annual turnover above £10,000 from 2019. 

Our research shows that landlords will be spending up to 2-4 times more with an accountant for filing quarterly self-assessment tax returns or they will be spending up to approximately 9 hours a year to file it themselves. 

Below we include case studies and comments from DIY landlords and accountants to assess the potential impact of the new system. 

TheHouseShop.com wanted to work out how much the new digital quarterly tax system will impact on landlords time, should they choose to file their self-assessment returns themselves, and what the financial impact would be for landlords who instead choose to hire an accountant.

HOW MUCH DO YOU VALUE YOUR TIME?

Landlords are constantly faced with the time vs money dilemma, based on an annual rental income of £30,000, the value for 1 hour of a landlord’s time would be £16.48. According to FixedFeeAccountants.co.uk, if the landlord has maintained their financial records in a spreadsheet, it should take them no more than 3 hours per quarter with a total of 8-10 hours a year, with an extra 3-4 hours to record their other sources of income such as PAYE, interest on savings and dividends etc.

We spoke to three chartered accountancy firms to find out a rough estimate of how much landlords could expect to pay for self-assessment services when Making Tax Digital is implemented.  

From this data, it is plain to see that accountants are estimating their fees to increase significantly once Making Tax Digital comes into effect and landlords currently employing an accountant are going to be spending a lot more compared to filing their self-assessment independently.

Not only would landlords need to process the payments on the free accounting software provided by HMRC each month, they will also need to keep up to date with constantly changing tax regulations and requirements - which could be yet another drain on landlords' already stretched time and resources.

LANDLORD CASE STUDY:

Many landlords are totally unaware of these potentially significant changes, as demonstrated by DIY private landlord, Christine Chaffin, who explains her concerns over the impact of the new system:

"I didn't know about these new changes and for one rental property, it's a 4-fold increase in the time I will spend doing tax affairs, from 2-3 hours once a year, to 2-3 hours every quarter. Like most landlords, I do have a life outside of managing my rental property and I'm bound to miss some deadlines for the new quarterly returns so I'm worried about the penalties that may apply for late filing."

"At a gross rental income of £13,000, it seems I must start doing this the year after next. I might have to get an accountant - and see if that cost can be recouped as an expense on my tax return!"

Nick Marr, Co-Founder of TheHouseShop.com, comments on the additional and unwanted burden for landlords:

“The frequency of making quarterly payments is quite excessive and could definitely be a serious barrier to some landlords, especially those private landlords who are already under a lot of pressure managing multiple properties independently.”

“It is clear to see a direct result of Making Tax Digital is an increase in the cost of accountant’s fees as well as the extra costs for the accountancy software packages, which will be yet another squeeze on landlord’s profits. Even though the government are claiming that this new tax system will help landlords know more about their tax payments, it will end up costing them a lot of money should they choose to use an accountant.”

“Although attempts and plans to make paying and recording tax simpler and more accessible to people are always appreciated, the free software package the government are saying they will be providing must be straightforward and effective for landlords to feel the benefit of the changes.”

HMRC have claimed that software providers will have to provide a free software package for landlords and accountants to submit returns under the new system. However, according to the accountants TheHouseShop.com contacted, it’s not as easy as it sounds to use an accounting software package and landlords risk hefty fines from HMRC for even minor mistakes.

On top of this, accountants also claim that the free version will be so basic that it is effectively useless and that in reality, the vast majority of people will need to shell out for a paid option to effectively process their tax returns. 

ACCOUNTANT CASE STUDY:

Gurpreet Sandhu, Chartered Accountant, 3 Wise Bears, commented on the potential impact of Making Tax Digital:

"It's complicated to know what will be required from landlords when Making Tax Digital comes into effect in 2020. There has been very little information provided by the government regarding the modernising of the current tax system, but what's almost certain is the requirement for quarterly returns to be submitted during the year plus an end of year declaration which will mean a lot of administrative effort being made from accountants."

"We expect the workload to increase by 3-4 times greater than it currently is in order to file a self-assessment tax return when Making Tax Digital comes in. This will greatly depend on the type of software solutions available and how easy it will be to use and transfer a client's report into."

"When Making Tax Digital comes in we expect the total costs excluding software to be 2 - 4 times more than now, I expect when we know what we have to do, we will try to make the process as efficient as possible for clients."

On the outset, Making Tax Digital isn’t looking too good for landlords, either they choose to spend more of their precious time on managing their self-assessment payments or, they spend more of their rental income on accountancy costs in order to save time. Not only will landlords need to spend more with an accountant once the new system is brought in, they will also need to spend money on the accounting software on top. Essentially what it boils down to is the age-old dilemma – time vs. money – and landlords are going to have to choose which road to take.

 

 

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