Making Tax Digital: Separate bank accounts for buy-to-let and self-employed

If you own a property that you rent out, or are self-employed and don’t have a separate bank account for the property or business, then it’s recommended that you set up a separate bank account.

If you have just one or two rental properties, then you may have the rent paid straight into your current account and any expenses may also be paid on the same debit or credit card that you use for daily life and the weekly shop. If you are a sole trader, you may pay for something personal out of the business account and allocate it to your drawings.

This is not usually a problem, as a sole trader or direct property owner you are taxable on the profit generated and the cash is yours, but it makes it harder to keep track of your business spending. It is worth highlighting that it is a different matter with an incorporated entity, such as a company, where it is usually not possible to just draw money personally without there being tax or legal consequences.

So why are separate bank accounts now being recommended for Making Tax Digital (MTD) purposes?

For efficiency

As MTD will require property and business transactions to be reported separately via an online system it will make it much easier to identify the relevant individual transactions. Many modern accounting software systems are able to upload information on transactions directly from a bank account, so they don’t have to be entered manually. Then the system just needs to be told what the transaction is for, and a lot of the work is done. They can also be trained to recognise repeat transactions which will cut down the work in the future.

There may be only a few transactions per month for a rental property, but having these in a personal account means separating out all the council tax direct debits and other bills for your own home as well as the daily coffee and the gym membership. If you have an accountant or bookkeeper looking after the work, or if you are doing it yourself, then it will save time and expense if you only have relevant transactions in the account.

For HMRC enquiries

It is possible to have enquiries into a single aspect of a tax return, let’s say the repair costs for a particular property. However, it is also possible to have an enquiry into an entire tax return which could mean providing supporting information such as bank statements. If you have a job which pays a monthly salary and one rental property, there may not be much supporting information that you need to supply. However, it’s simple and clear if you have a separate bank account for the property. On the other hand, if you have everything going through your personal account and you have to send HMRC all the statements, this means that they also have access to all your personal transactions which could open up additional questions.

In summary, while there might be a few forms to fill in to get a new account, and possibly some extra bank charges, it will be worthwhile to keep information separate, so that the minimum amount of relevant information goes to HMRC and processing is more efficient. This, in the longer term, will help keep processing time down and your record keeping more up to date and accurate.

If you would like to find out more about Making Tax Digital or if there is anything else we can help you with, please don’t hesitate to get in touch with our team.