Accurate record-keeping is vital in making sure your tax return isn’t a cause of stress for you – but what information do you need to keep? And what’s the best way to look after it?
From dealing with tenants to managing your tax return, if there’s one message I want to get across, it’s this: record everything, keep it tidy, do it digitally and please, please make backups.
It can take a while to get into the routine of keeping records, especially if you’re a first-time or accidental landlord used to having your tax dealt with through PAYE. It’s like cleaning your teeth, though, or watering the garden plants – a habit you need to make part of your routine.
Setting aside time each day, week or month to make sure your records are up to date is one way to approach it. You can even stick it in your diary, or use a task management app to nag you at intervals.
It’s definitely a job that is easier if you check in regularly rather than trying to catch up on a whole year’s-worth of paperwork in December – which, unfortunately, is all too common.
The more organised you keep your records, the better. Keep paper records filed using whatever system works for you. Give electronic files unique names, ideally ones which make it easier to find them using search, and consider putting them in folders arranged by date or record type.
We recommend keeping records digitally because, look, it’s almost 2021, and it just makes sense. With Making Tax Digital (MTD) now clearly on the horizon (see below), it is even more important that the digital route is followed.
Accountants used to joke about clients turning up at the office with carrier bags full of crumpled receipts on 30 January. That’s not been our experience over the years – landlords are a pretty savvy bunch, on the whole – but there is still a bit too much paper about for our liking. Between online banking, receipt scanning apps and free or cheap cloud-based document storage, it’s never been easier to keep records online.
And as for backups, they’re important whether you keep records digitally or otherwise. There’s flood and fire to think about, for starters. Then there’s the possibility of your computer getting stolen or the hard drive deciding to die.
Aim to make a full copy of your records at regular intervals and store this backup on a second premises – whether it’s the office, at home or in a storage locker. Most people use a password-protected hard drive of some kind but, again, cloud storage such as Google Drive, DropBox or Microsoft One makes this really easy. You can even automate backup so you don’t have to think about it.
That’s the basic principles covered, then, but what about specifics?
Self-assessment tax records
If you complete a personal tax return, HMRC says you have to keep ‘accurate, complete and readable’ records.
If they ask to see your records and you can’t produce them, you might get a penalty.
They aren’t strict about how you keep your records, but they do have to be sufficient to be able to prove the income received and expenses incurred. There are rules about how long you have to retain them. If your tax return is delivered on time – 31 January 2021 is the next deadline – you’ll need to keep hold of the relevant records for at least 22 months after the end of the relevant tax year if you are employed or a landlord. If you are self employed or in a partnership, you need to keep the records for 5 years and 10 months after the end of the tax year.
Making Tax Digital (MTD)
MTD is already an obligation for businesses (which includes landlords whose VAT taxable turnover is from commercial lettings) who are registered for VAT and whose taxable turnover exceeds £85,000.
The government has announced that from April 2023, MTD will apply to the self employed and landlords whose gross turnover/rental income (before deducting any expenses) exceeds £10000. The proposal is that all such businesses will have to keep their records digitally from 6 April 2023 and they will have to make a quarterly report of the income and expenses to HMRC. There will then be a final return for the tax year to confirm the annual figure. HMRC have said that this is to prevent errors occurring and have confirmed that the payment dates for tax will not change.
We’ll be rolling out our recommendations on how to meet the MTD challenge later and helping clients move over to digital record keeping well before the go live date in April 2023.
The government has announced that MTD will also be rolled out for Limited Companies but no date has yet been set.
Limited company records
If your property business operates as a limited company, for example, you’re obliged to keep records for six years from the end of the relevant financial year or longer under certain circumstances.
The Companies Act requires that you keep proper accounting records which keep an accurate record of day to day transactions. The obligations are more onerous than for an individual.
You’ll also need to keep details of directors, shareholders and company secretaries; the results of shareholder votes; debentures (loan repayment promises); indemnities (security against legal liabilities); share transactions; and loans or mortgages secured against company assets.
You also need to keep a register of ‘people with significant control’ – those with more than 25% shares or voting rights, people who can appoint or remove a majority of directors or who influence or control your company or trust.
On the accounting side, limited companies have to record money received and spent by the company, details of company assets, company debts, stocktaking data, information on goods bought and sold – and from whom.
Good records keep your tax bill down
Apart from statutory requirements, there’s a good reason to keep your records complete and in good order: it helps us reduce your tax bill.
When it comes to houses and flats in particular, detailed records of anything you’ve spent on maintaining your property. That’s because they’ll most likely either be considered allowable expenses, deductible against income, or will help reduce a future capital gains tax bill.
As your property tax return accountants, the more information we have, the easier it is for us to spot opportunities to claim tax relief – or suggest strategies for reducing your tax bill in future.
Should HMRC question your tax return, records also make it quicker and easier to counter their queries. It also sends strong signals of trustworthiness and transparency.
Beyond tax and finance
When it comes to property, record-keeping is a good habit to get into more generally.
As a landlord myself, I’ve learned the hard way over the years that keeping detailed records of interactions with tradesmen, letting agents and tenants is vital.
With tenants especially, make sure you carry out an inventory when they move in, taking note of every chip in the paintwork and all the fixtures and fittings.
Keep formal notes of your dealings with tenants, too. Even if everything is amicable today, you don’t know how things might turn out in a year or two.
It’s not just about protecting yourself – it’s also about peace of mind for them and being a professional landlord they can trust.
We can handle your property tax return. Get in touch to find out more.