Publish Date
Jan 23, 2023
Industry Insights
HMRC has issued Revenue and Customs Brief 1 (2023) following its recent consultation on the option to tax process.
From 1 February 2023, HMRC will not:
These are significant changes which will have an impact on all real estate transactions or business sales involving land and property assets. It will become even more important for persons opting to tax to check these have been properly notified and approved by the correct person, and to keep detailed records on file – not always easy when options to tax have been made in the dim and distant past.
Notwithstanding negative feedback provided by various professional bodies and advisers (including A&M) in response to the consultation, it is understood that the changes are the result of increasing demands on HMRC’s systems and processes, and the consequent significant delays currently being experienced in processing both option to tax related requests and other VAT related correspondence. It is an unfortunate sign of the times that more and more of the VAT administrative burden is being passed to businesses as a result of HMRC cost cutting measures.
An option to tax allows a person or business to charge VAT on supplies of non-residential property (e.g. leases, rentals or sales) and to therefore make taxable supplies instead of otherwise VAT exempt supplies. Exercising an option to tax means that VAT on costs associated with those taxable supplies can be recovered, where this VAT would otherwise be an irrecoverable cost. Provided the recipient of the supplies is also making taxable supplies and can recover the VAT charged, there should be a net nil VAT position overall, although the parties will need to manage any associated VAT cashflow implications between them. An option to tax is also required where an opted property is being transferred as part of a TOGC so that the transfer is VAT free.
Option to tax notifications
In 2022, HMRC trialled some changes to how they acknowledged option to tax notifications. As a result, HMRC’s standard operating practice changed from performing extensive validity checks and sending formal considered written acknowledgements, to instead sending a letter confirming ‘receipt’ of an option to tax notification for a defined property, with effect from the stated date. This meant that HMRC no longer performed any detailed verification checks on whether the option to tax notification was approved by an authorised signatory. HMRC has indicated that it will also now stop issuing option to tax notification receipt letters from 1 February 2023. These confirmations have formed the basis of evidence of an option to tax in relation to property transactions for years and have been included as required evidence in legal drafting.
Under the arrangements, where option to tax notifications are sent to HMRC by email, the only evidence of the date of notification that will be received by the notifier will be HMRC’s automated response email (which must be kept on file). The onus for evidencing that an option to tax has been made (as well as ensuring that the correct steps having been followed to exercise and notify an option to tax) will continue to be the responsibility of the person notifying HMRC of an option to tax. However, as HMRC will no longer check the validity of option to tax notifications, it is crucial that all relevant information is held, recorded and kept on permanent file by the person notifying the option should HMRC wish to later inspect this or raise any associated future queries.
Where notifications are sent to HMRC by other means (e.g. by post) the person notifying will need to obtain and keep copies of alternative evidence of submission to HMRC (e.g. copies of special /recorded delivery tracking and delivery information) along with copies of all related correspondence with HMRC. Currently, HMRC will not provide any automated or other form of response for postal notifications.
Evidence of previous options to tax
HMRC has announced that it will no longer be accepting requests to check their records for evidence of previous options to tax, except in certain specific circumstances i.e.:
Any requests falling within the above specific circumstances will need to include a letter or deed of appointment of the role of the person making the request, as well as other details (i.e. name of the opter; VAT registration number (if any); full address of the land/property including postcode; the effective date of the option to tax (if known); the date VAT was first charged on the opted land/property; and the date the property was acquired and/or a loan was taken out by the opter on the relevant property).
There are two required steps to exercise an option to tax. Firstly, the decision to opt to tax must be made and secondly, the option to tax must then be notified to HMRC within 30 days of that decision.
As already the case currently, proof of the decision to opt to tax (e.g. recorded in board minutes, contracts or other internal correspondence) must be held on file and within VAT records to support both the decision itself and the effective date of the option to tax.
A copy of all information submitted to HMRC in relation to the option to tax notification also needs to be kept on file together with a copy of HMRC’s automated email response (or other proof of delivery by post) as above. We recommend a read receipt is attached to emails sent to HMRC to further evidence date and time of submission/notification to HMRC of the option to tax.
As HMRC will no longer offer the option of checking their records for previous option to tax notifications made (except in the specific circumstances above), it will now be even more important for persons exercising options to tax to ensure that they hold full and complete information on permanent file in order to evidence this and the VAT treatment applied to related property transactions.
This will be especially important in the case of a future sale of the business for example where the purchaser will wish to check and review this information (such as in a transfer of a going concern situation or sale of shares in the company holding the property concerned) and a lack of such information could significantly delay or complicate such transactions.
No – notifications should still be made in the same format as before. However, given the current lack of any automated receipt process for postal notifications, we would recommend that notifications are sent to HMRC by email in all circumstances. This will ensure that at least the automated response email can be kept on file alongside all the other documentation to support option to tax notifications having been properly made.
Based on the limited guidance so far, we would not expect HMRC to normally agree to check their records for previous notifications received. It may be possible to request that HMRC check the position on an exceptional basis but this will depend on the particular facts and circumstances involved and there is no guarantee HMRC will agree to this.
If, at a later stage, the notified option to tax is considered invalid, HMRC will take appropriate corrective action depending on the particular circumstances involved. This could include penalties and could result in significant commercial and financial issues if previous supplies of the property need to be revisited. It is therefore important that the person making and notifying any option to tax follows the correct process to ensure their option to tax is valid and keeps detailed records to fully support this.
This will impact persons or businesses across all sectors who hold interests in property and make supplies of that property. However, it will have the biggest impact where property transfers such as sales of property freeholds or leases occur and proof of an option to tax needs to be provided to the buyer. Where property transactions occur, the option to tax records are likely to be subject to additional scrutiny between the parties where no formal acknowledgement letter from HMRC is held, which could result in unwelcome delays, cost and commercial implications if the records are incomplete.
Affected persons will need to check and update their processes to ensure that the appropriate records are held on file to support and evidence both any decisions to opt to tax and any notifications of options to tax to HMRC. As HMRC will no longer be accepting standard requests to check their records for evidence of options to tax with effective dates within the last 6 years, we recommend that historic records are reviewed to ensure that the appropriate evidence of any such previous options to tax is located and held on permanent file by the business. We also recommend that staff training is provided to ensure they are fully familiar with the option to tax notification and record keeping requirements and so that your option to tax and VAT accounting position is fully supported and evidenced.
We expect that HMRC will continue to monitor these procedural changes and any associated feedback, therefore there could be further changes introduced to reflect this (for example, to provide some form of automated or other response to postal notifications received to maintain equity with email notifications). Regardless, we recommend that you check your VAT accounting and property records to ensure effective, detailed and complete option to tax records are being held and kept on permanent file.
In our view, HMRC’s changes are extremely unhelpful, as they will cause both practical and commercial problems and could actually cause some transactions to stall. For example, if a property (or company) sale needs to happen quickly due to commercial requirements and where it is crucial for both contracting parties to understand whether an option to tax has been previously notified to HMRC, but historic records are incomplete or inconsistent (e.g. due to high staff turnover or where business transfers have occurred). The limited circumstances that will be available to request copies of evidence of previous options to tax from HMRC is therefore particularly unwelcome as such evidence needs to typically be provided quickly to the other party in order to support the VAT accounting treatment applied and invoicing. The lack of a letter of receipt or any form of receipt from HMRC for postal notifications is also inequitable. Hopefully, HMRC will monitor and further address this point.
In addition, the proposed changes provide no scope for recording by HMRC of the effective date of an option to tax that has been notified (i.e. only the ‘notification date’ would be supported by an automated email response in cases where notified by email). This may therefore result in queries or issues in cases where records of the business differ from HMRC’s records, or where information is otherwise missing. It is therefore now even more crucial that you check and maintain complete and detailed records of all option to tax related documentation.
If you would like us to advise you further regarding this matter or if you have any questions regarding your own situation, please contact us or your usual A&M VAT adviser.
