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

This framework ensures that businesses, sole traders, and landlords maintain transparent and detailed records of all financial transactions throughout the tax year.

What Should Be Included in Trading Income and Expenses for Making Tax Digital For Income Tax?

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: 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.

• Other Business Income: 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.

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.

Business Expenses

When reporting business expenses, the following categories should be used:

• Cost of goods bought for resale or goods 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.

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.

• 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.

• 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.

• 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)

• 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

• 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.

• 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.

• 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.

• 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.

• 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.

How Can You Categorise Property Income and Expenses Under MTD for Income Tax?

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

• Total rent received

• 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.

UK Property Expenses

• 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.

• 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

• 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.

Foreign Property Expenses

• 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.

• 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.

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

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.

Additional Resources

• MTD Digital Records: gov/create-digital-records