Option to Tax - Important HMRC changes

Options to Tax – Important HMRC changes

HMRC recently concluded a consultation with regard the option to tax processes.  Clearly, HMRC recognised that their ability to process options to tax has taken a significant drop over the last two years and with no signs of improvement on the horizon. 

At present, HMRC are taking around six months to respond to options to tax applications and enquiries, with the ability to telephone and speak to someone increasingly difficult.  HMRC have therefore implemented the following changes.

What is the option to tax?

The option to tax (OTT) allows a business to charge VAT on the sale or rental of non-residential property, otherwise known as a taxable supply.  This option is usually elected so as to waive the land exemption of commercial properties and instead opt to tax, charging VAT at the standard rate on the supply of buildings, allowing additional VAT recovery on costs that would have otherwise been charged.

Why is the OTT made?

Supplies of buildings and land, such as freehold sales, rental and leasing are normally exempt from VAT, meaning that no VAT is payable by selecting this option.

HMRC changes as of 1 February 2023

The following changes have been announced further to the recent consultation and will take effect as of 1 February 2023:

HMRC are no longer confirming the option to tax

The taxpayer is responsible for notifying their desire to opt to tax (also sometimes referred to exercising the right to waive exemption). Under current process, the option to tax has to be notified to HMRC and also confirmed in writing by HMRC and is it is this confirmation that often leads to delays as vendors and buyers will be required to present proof of an option to tax and having to wait months to obtain the confirmation.

The change from 01 February 2023 is that HMRC will no longer send a written confirmation of the option to tax when the option to tax is notified by email.  The taxpayer would submit their VAT1614 forms via the email optiontotaxnationalunit@hmrc.gov.uk and the sender will receive an automatic response or acknowledgement contrary to the written confirmation that has been sent by HMRC since 1989, which was used as evidence when buying property.

Should an option to tax be notified in writing, HMRC will no longer send an confirmation. There is a risk that the application is lost in the post so we do not recommend posting applications, the notification should be sent via email only in order to receive the automatic acknowledgement. 

Whether email or postal, the presumption will be that the taxpayer has made a correct option to tax and met all the conditions required correctly (the inference being that HMRC will not check the applications). The taxpayer may have made an error when opting to tax (wrong address, an unusual shaped plot of land or not met the other conditions) and therefore the option to tax could be invalid.

At least by submitting via email, there will be a clear confirmation the application has been received, this should be sufficient to satisfy the legal teams involved in a property sale.

HMRC will not  provide notifications about the option to tax until six years have passed

The second change is that HMRC will cease processing requests to confirm the existence of an option to tax. 

Currently, where a business wants confirmation of an option to tax, the taxpayer can write or email HMRC and they will confirm whether there is a record of an option to tax or not on that property.  Sometimes the response can be ambiguous, stating that they do not hold a notified option to tax on the specific property but that does not mean that there isn’t an option to tax on the property, only that HMRC do not hold any evidence. 

The change from February 2023 is that the option to tax forms a part of the traders business records and those business records must be retained for a minimum of six years and requests will not be entertained.  However, if the option to tax is more than six years old, HMRC will still accept a request for copy/proof of option. 

When will HMRC accept the request to check an OTT record?

If a request is made under one of the following conditions, then HMRC will check to see if they hold a record of an Option to Tax for the relevant property:

  • The effective opted date is likely to be over six years ago, or
  • If you have been appointed as a Land and Property Act Receiver, or an Insolvency Practitioner to administer the property in question.

If these conditions are met a request to confirm that an Option to Tax is in place on the relevant property must be accompanied by a letter or deed of appointment of your role, otherwise HMRC will not assist.

Other details required to submit an OTT

The taxpayer should also provide the following details:
• Name of the Business/person who had opted to tax the property 
• A VAT Registration Number (if applicable)
• The full address of the land/property in question, including postcode. 
• The effective date of the option to tax if known.
• The date you first charged VAT on the opted land/property.  – The date the property was acquired and/or a loan was taken out by the opter on the relevant property

Get in  touch

Should you require advice relating to waiving of land exemptions or option to Tax, or have any other property tax queries, get in touch with our VAT  or Tax experts who will be happy to assist and better inform you of the HMRC requirements and your options.

Photo by Bethany Opler on Unsplash

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