Changes to VAT options to tax

From 1 February 2023, HM Revenue & Customs (HMRC) are changing the way they process and acknowledge options to tax. What does this mean for property companies and their professional advisors?

The main change will see HMRC ceasing to issue any form of letter confirming the receipt of an option to tax. HMRC stopped issuing letters formally acknowledging an option to tax from September 2022, with all options to tax now needing to be sent to HMRC by email only to: optiontotaxnationalunit@hmrc.gov.uk

What do you need to know?

HMRC advise that the address of the property, including its postcode and the effective date of the option to tax, should be included in the subject line of the email. HMRC will then issue an automated email response, and this will need to be retained as the only evidence that an option to tax has been notified.

Without sufficient detail in the subject line that identifies the property, there will be no way of distinguishing one automated reply from another. This will not be as simple as it sounds however, where for example if you have multiple properties being opted at the same time. Furthermore, these automated email responses will not confirm that the option to tax has been validly made, or that HMRC has carried out any checks or approved the option to tax. It will be the responsibility of the opter to ensure that the option to tax has been validly made and notified.

In addition to the above, HMRC will also cease to respond to requests, by businesses or their advisors, asking for confirmation of whether an option to tax has been notified in the past. The only exceptions to this will be where HMRC has a record of an option that was made more than six years ago, or where a Land and Property Act receiver, or an insolvency practitioner has been appointed and confirmation isn’t readily available from the business records.

Interestingly, the law has never required HMRC to issue any form of acknowledgement or confirmation of an option to tax, and perhaps their policy of doing so over many years has made a rod for their own back. However, by retracting from their long-standing policy, property businesses and those engaged to advise them need to understand the consequences of HMRC’s new policy and react accordingly.

What are the potential consequences?

Firstly, the law states that business records (including an option to tax) must be retained for at least six years. However, under normal circumstances an option to tax applies to a property for 20 years. It is therefore strongly recommended that evidence is retained for this longer period in order not to have to rely on HMRC where required for future transactions.

More immediately, VAT clauses in many property sales and purchase agreements will need to be considered, especially where these are in respect to transfers of ongoing concerns which are often drafted – with a requirement for the buyer to provide written evidence of the option to tax to the seller, and vice versa.

All too often a problem arises where a business decides to opt to tax and charges VAT but forgets to notify HMRC, leading to a request for a belated notification. HMRC hasn’t indicated how they intended to deal with these situations after 1 February 2023. However, without having to correspond with taxpayers on the majority of normal options to tax, it is hoped that they will have more time and resources to deal with the more complex scenarios.

HMRC appears to have disregarded the Office of Tax Simplification’s recommendation to introduce a digital database of all options to tax. Instead, HMRC has described these changes as refinements to the option to tax notification process. In reality, what it means in practice is an increasing onus on property businesses to ensure they retain accurate information and evidence of notification for all options to tax. Businesses and solicitors will need to accept an increased risk when dealing with certain property transactions, with an acceptance that an option to tax has been notified but without any proof from HMRC.

Would you like to know more?

If you would like to discuss any of the above issues or are seeking to mitigate VAT costs on this or any other areas of expenditure, please contact your usual Blick Rothenberg contact or Alan Pearce, using the form below.