How to Categorise Property and Business Finances under MTD for Income Tax

• Under MTD for Income Tax, income and expenses are reported separately for each business. All UK rental properties count as one business, and all overseas properties as another.

• Trading income splits into turnover and other business income, with expenses recorded under HMRC's set category headings such as cost of goods, staff costs, premises costs, and professional fees.

• Property income is reported separately for UK and foreign property, and each property business type (residential, commercial, furnished holiday let) is kept distinct.

• Residential property finance costs are restricted, claimed as a basic rate tax reducer rather than a full deduction, and any unused amount is carried forward.

• Disallowable expenses, private-use adjustments, capital allowances, and brought-forward losses are handled at the year-end finalisation, not in the quarterly updates.

Turnover refers to the total sales or revenue generated by a business from its core trading activities before any deductions are made for expenses. This figure includes all amounts earned from selling goods or providing services to customers during the accounting period.

It is crucial to keep accurate records of all sales invoices and receipts to support the declared turnover figure, as this forms the basis for calculating profit and ultimately, the amount of tax due. It includes:

1. Sales of goods produced or bought for resale.

2. Fees earned from professional or consultancy services.

3. Income received for work done or services rendered during the accounting period.

Note: Maintaining a clear audit trail of these records is essential, as turnover figures are the primary input in tax calculations and compliance reviews

It encompasses all additional income streams that are not directly related to the main trade or core business activities. Such income should be itemised separately from turnover, allowing for clear distinction and transparency in financial reporting.

Properly categorising other business income ensures compliance with Making Tax Digital for Income Tax (MTD IT) requirements and provides a more accurate picture of the business's financial health.

Examples include:

1. Commissions or referral fees.

2. Income from rent of business assets or equipment.

3. Insurance recoveries for lost stock or compensation related to business activities.

4. Grants, subsidies, or business support payments.

Note: By itemising these separately, businesses ensure transparent reporting and provide a complete picture of all income sources under MTD ITSA.

• Cost of goods bought for resale or goods uses

This refers to the purchase price of items intended to be sold directly to customers, as well as any raw materials or components used in the production of goods for sale.

It includes:

1. Purchases of finished goods for resale.

2. Costs of raw materials and consumables used in manufacturing.

3. Freight, import duties, and direct carriage costs associated with stock.

Note: Accurate stock records are crucial to calculate cost of goods sold, which directly impacts taxable profits.

• Construction industry – payments to subcontractors

It Includes payments made to subcontractors for work carried out on construction projects, such as building, renovation, or specialist services within the industry.

It includes payments made to subcontractors for:

1. Labour and specialist services such as electrical, plumbing, roofing, or groundwork.

2. Renovation, alteration, or demolition work.

Note: All CIS deductions, if applicable, must be recorded separately to reconcile tax credits or liabilities under HMRC rules.

• Wages, Salaries and other staff costs

It covers all payments to employees, including salary, wages, bonuses, pensions, and other staff benefits, as well as employer National Insurance contributions.

It Covers all costs associated with employing staff, including:

1. Salaries, hourly wages, overtime, and bonuses.

2. Employer's National Insurance contributions.

3. Pension contributions and staff benefits.

4. Holiday pay, sick pay, or redundancy payments.

Note: Comprehensive payroll records must be maintained for verification during compliance checks.

• Rent, rates, power and insurance costs

It Includes rent payments for business premises, local authority rates, utility bills (such as electricity and water), and insurance premiums covering property and business risks.

It Covers property-related operational costs such as:

1. Rent of business premises.

2. Business rates and council charges.

3. Utilities (electricity, gas, water, and waste disposal).

4. Insurance policies

Note: Where premises are used partially for private purposes, a fair apportionment should be made.

• Repairs and maintenance of property and equipment

It includes the expenses related to keeping property and equipment in working order, such as fixing faults or servicing machinery, but excluding significant upgrades or improvements.

Note: Capital improvements or upgrades that enhance value should not be included here but treated as capital expenditure.

• Car, van and travel expenses

It encompasses costs for business-related travel using cars, vans, or other means, such as fuel, maintenance, public transport and parking.

It includes expenditure on travel and transport necessary for business operations:

1. Fuel, servicing, repairs, and insurance for business vehicles.

2. Hire or lease costs for vans or company cars.

3. Parking, tolls, public transport, and business mileage (excluding home-to-work travel)

Note: Accurate mileage logs should be kept distinguishing between personal and business use.

• Phone, fax, stationery and other office costs

It covers communication expenses (including phone and fax), stationery, postage, printing, and other supplies necessary for running the office.

It covers general office administration expenses such as:

1. Telephone, fax, and internet services.

2. Postage, stationery, and printing supplies.

3. Subscriptions for software, licenses, and office consumables.

4. Advertising

It includes spending on promoting goods or services, such as online adverts, newspaper listings, flyers, billboards, or sponsorships.

It Includes expenditure on promoting the business and attracting customers:

1. Digital and print advertising (Google Ads, newspapers, magazines).

2. Sponsorships, trade shows, and public events.

3. Website hosting, branding, and promotional materials.

Note: Advertising costs that promote the business are allowable, but those with a personal benefit (e.g., personal gifts) are not.

• Business entertainment costs

It refers to the costs incurred when entertaining clients or business contacts, such as meals, events, or tickets to shows. Note that some of these expenses may have limited tax deductibility.

Note: However, these are usually not deductible for tax purposes but still must be recorded to maintain complete financial transparency.

• Interest on bank and other loans

It comprises the interest paid on borrowings from banks or other lenders for business purposes, excluding repayments of the loan principal.

• Bank, credit card and other financial charges

It refers to the charges incurred for banking services, credit card processing, overdraft facilities, or other financial transactions related to the business.

It Covers:

1. Bank account maintenance fees.

2. Credit card processing and transaction charges.

3. Charges for currency exchange, overdrafts, or loan administration.

4. Accountancy, legal and other professional fees

It refers to the payments made for professional advice and services, including accountants, solicitors, consultants, and other experts supporting the business.

It includes payments made for professional support and advice:

1. Accountants, auditors, and tax advisors.

2. Solicitors and legal representatives.

3. Consultants or business advisors.

Note: Professional fees directly connected to business operations are allowable; personal legal costs are not.

• Other business expenses

It Includes miscellaneous costs necessary for running the business, which do not fit into the specified categories, such as subscriptions or training.

It includes miscellaneous allowable costs necessary for running the business:

1. Staff training, professional memberships, and trade subscriptions.

2. Small equipment purchases, uniforms, or safety gear.

3. Costs not captured under other specific headings but wholly business-related.

Note: Any adjustments for disallowable expenses may be made as part of the year-end finalisation process. Whether a cost is allowable in the first place depends on the wholly and exclusively rule rather than which heading it sits under. Our guide to allowable expenses explains which costs qualify and which are disallowed.

UK property income should be reported with separate totals for the following items:

• Total rent received

This refers to the complete amount of rent payments collected by a landlord or property owner from tenants during the relevant accounting period. It includes all periodic rental payments for the use of a property, before the deduction of any expenses or costs, and regardless of whether the rent is paid weekly, monthly, quarterly, or annually.

• Other income derived from property

This covers additional income streams associated with the property that are not strictly rent. Examples include charges to tenants for services such as cleaning, maintenance, parking fees, or use of communal facilities, as well as income from advertising space or granting access rights. Essentially, it encompasses any revenue generated from the property aside from standard rent payments.

• Premiums for the grant of a lease

This is a lump sum payment received by the landlord in exchange for granting a new lease or extending an existing lease to a tenant. Unlike regular rent, a premium is typically paid upfront at the beginning of the lease term and can relate to both commercial and residential properties. This income is taxable and must be allocated appropriately between capital and revenue portions depending on lease duration.

• Reverse premiums and inducements

Reverse premiums are sums paid by a landlord (or sometimes a tenant) as an incentive to encourage another party to enter into a lease agreement or to vacate a property. Inducements can include cash payments, rent-free periods, or contributions towards tenant fit-out costs. These are generally offered to attract tenants to take on a lease or to persuade an existing tenant to surrender their lease early.

• Rent, rates, insurance and ground rents

This refers to the regular payments made for leasing a property (rent), local authority charges such as council tax or business rates (rates), insurance premiums to protect the property against risks, and ground rents which are payments made by leaseholders to the freeholder of the land on which the property stands.

• Property repairs and maintenance

These are costs incurred to keep the property in good working condition, including fixing faults, carrying out routine maintenance, and replacing worn-out items, but not improvements which enhance the value of the property.

• Non-residential property finance costs

Interest and other financial charges associated with loans or mortgages taken out for commercial or non-residential properties, such as shops, offices, or warehouses.

• Residential property finance costs

Interest and financial charges on loans or mortgages related to residential properties, such as houses or flats. These costs are subject to specific tax restrictions.

• Residential finance costs brought forward

Any residential property finance costs from previous accounting periods that were not fully utilised or claimed and are carried forward to be deducted against future income.

These finance costs cannot be deducted from rental profit in the way other expenses are. Under section 272A of ITTOIA 2005 the deduction is restricted, and relief is instead given as a reduction in tax at the basic rate of 20 per cent under section 274A, applied after the profit has been calculated.

• Legal, management and other professional fees

Fees paid for professional services associated with the property, including solicitors for legal matters, property managers for day-to-day administration, accountants, and other consultants.

• Costs of services provided, including wages

Expenditure on services offered to tenants, such as cleaning, gardening, security, or concierge, as well as wages paid to staff employed to provide these services.

• Travel expenses

Costs incurred for travel relating to the management or maintenance of the property, for example, visiting the property or meeting with tenants or contractors.

• Other allowable property expenses

Any additional expenses that are permitted under tax rules, such as advertising for tenants, phone calls, stationery, or utility bills paid by the landlord.

Foreign property income should be presented with separate totals for the following:

• Total rents received

This refers to the entire amount of rental income collected from tenants for letting out property during a specified period, before deducting any expenses or costs associated with the property.

• Other income from property

This covers any additional earnings related to the property that are not part of the standard rent. Examples might include income from parking fees, service charges paid by tenants, or payments for the use of communal facilities.

• Premiums for the grant of a lease

This is a lump sum payment made by a tenant to a landlord in exchange for being granted a lease on a property, often at the beginning of the lease term. It is separate from regular rental payments.

• Rent, rates, insurance and ground rents

These are regular payments made by the landlord in relation to the property. Rent refers to amounts paid for the use of land or buildings. Rates are local authority charges, such as property taxes. Insurance covers the cost of insuring the property against risks like fire or damage. Ground rents are fees paid to the owner of the land on which a property is built.

• Property repairs and maintenance

Expenses incurred to keep the property in good condition, including fixing damage, servicing equipment, and general upkeep. This does not include improvements or additions that increase the value of the property.

• Non-residential property finance costs

It includes the interest and finance charges related to loans or mortgages taken out for non-residential properties, such as commercial buildings, offices, or shops.

• Residential property finance costs

It includes the interest and finance charges on loans or mortgages for residential properties, such as houses or flats let to tenants.

The same restriction applies to foreign residential property. Under section 272A of ITTOIA 2005 the finance costs are not deducted from rental profit, and relief is given instead as a basic rate tax reduction under section 274A.

• Unused residential finance costs brought forward

Finance costs relating to residential properties that could not be used to offset rental income in previous tax periods and are carried forward to be claimed in future periods.

• Legal, management and other professional fees

It includes the fees paid for professional services connected to the property, including solicitors, letting agents, accountants, and surveyors.

• Costs of services provided, including wages

It refers to the expenditure on services offered to tenants or for the upkeep of the property, such as cleaning, gardening, security, and wages paid to staff performing these services.

• Travel expenses

It encompasses costs incurred for travel related to managing or maintaining the property, such as visiting the property for inspections, repairs, or meeting tenants.

• Other allowable property expenses

Any additional expenses permitted under tax rules that relate to the running or maintenance of the property, such as advertising for tenants, phone calls, stationery, or utility bills paid by the landlord.