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The Income and Expense Headings under Making Tax Digital for Income Tax (MTD IT) provide a structured framework for accurately recording and reporting all trading and property income and expenses in compliance with HMRC’s digital reporting requirements. This framework ensures that businesses, sole traders, and landlords maintain transparent and detailed records of all financial transactions throughout the tax year.
Under MTD IT, each business activity (All UK rental properties are treated as one business activity, while all overseas properties form another) must be reported separately, distinguishing between different income streams and expense categories to enable accurate profit calculation and tax reporting. The following sections outline the standard headings, descriptions, and examples relevant to both trading and property income, ensuring consistency, accuracy, and compliance.
Trading Income and Expenses
The following outlines the income and expense headings relevant to trading income and expenses under Making Tax Digital for Income Tax (MTD IT). Please note that all amounts should be reported separately for each business.
Business Income
Business income should be itemised with clear separation between turnover and other sources of business income, ensuring transparency and accuracy in reporting.
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:
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:
Note: By itemising these separately, businesses ensure transparent reporting and provide a complete picture of all income sources under MTD ITSA.
Business Expenses
When reporting business expenses, the following categories should be used:
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:
Note: Accurate stock records are crucial to calculate cost of goods sold, which directly impacts taxable profits.
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:
Note: All CIS deductions, if applicable, must be recorded separately to reconcile tax credits or liabilities under HMRC rules.
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:
Note: Comprehensive payroll records must be maintained for verification during compliance checks.
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:
Note: Accurate mileage logs should be kept distinguishing between personal and business use.
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:
Note: Where premises are used partially for private purposes, a fair apportionment should be made.
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.
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:
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:
Note: Advertising costs that promote the business are allowable, but those with a personal benefit (e.g., personal gifts) are not.
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.
It comprises the interest paid on borrowings from banks or other lenders for business purposes, excluding repayments of the loan principal.
It refers to the charges incurred for banking services, credit card processing, overdraft facilities, or other financial transactions related to the business.
It Covers:
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:
Note: Professional fees directly connected to business operations are allowable; personal legal costs are not.
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:
Note: Any adjustments for disallowable expenses may be made as part of the year-end finalisation process.
Property Income and Expenses
The income and expense headings for property income under MTD IT are set out below. Full details can be found in the Update notice, specifically in the property income section. As with trading income, adjustments for disallowable expenses may be made during the year-end finalisation process. Property income must also be categorised accurately, with separate reporting for UK and foreign property. Each type of property business (furnished holiday lets, residential, commercial) should be reported distinctly.
UK Property Income
UK property income should be reported with separate totals for the following items:
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.
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.
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 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.
UK Property Expenses
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.
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.
Interest and other financial charges associated with loans or mortgages taken out for commercial or non-residential properties, such as shops, offices, or warehouses.
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.
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.
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.
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.
Costs incurred for travel relating to the management or maintenance of the property, for example, visiting the property or meeting with tenants or contractors.
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
Foreign property income should be presented with separate totals for the following:
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.
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.
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.
Foreign Property Expenses
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.
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.
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.
It includes the interest and finance charges on loans or mortgages for residential properties, such as houses or flats let to tenants.
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.
It includes the fees paid for professional services connected to the property, including solicitors, letting agents, accountants, and surveyors.
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.
It encompasses costs incurred for travel related to managing or maintaining the property, such as visiting the property for inspections, repairs, or meeting tenants.
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.
Year-End Review and Adjustments under MTD IT
At the end of the tax year, businesses and landlords are required to review their financial records to make necessary adjustments. This includes removing any disallowable or private-use expenses, applying capital allowances where applicable, accounting for any brought-forward losses or unused finance costs, and ensuring that all figures are accurately reconciled with the digital records maintained throughout the year.
Conclusion
In conclusion, the proper classification and reporting of income and expenses under Making Tax Digital for Income Tax (MTD IT) are vital for maintaining accurate digital records and ensuring full compliance with HMRC requirements. By adhering to the specified income and expense headings, businesses and landlords can achieve consistency, transparency, and accuracy in their financial reporting. Clear separation of trading, UK property, and foreign property activities allows for precise tax calculations and reduces the risk of errors during digital submissions.
Furthermore, carrying out year-end adjustments such as excluding disallowable expenses, applying capital allowances, recognising brought-forward losses, and reconciling all figures ensures that taxable profits are correctly reported. Maintaining well-organised, up-to-date records throughout the accounting period not only supports compliance but also provides a clear financial picture that aids effective business management and decision-making under the MTD framework.