What are the changes to HMRC option to tax process?

With the start of a new year, we’ve seen a number of administrative changes from HMRC that impact VAT. Of these, the two most notable are the new VAT penalty regime (see my recent blog) and changes to the way HMRC will be dealing with options to tax (OTT).

Background to option to tax

Options to tax are commonplace when buying, selling, or letting land or property. By opting to tax, income that would have been exempt from VAT becomes standard rated. This means you can claim back the VAT on costs relating to the opted property.

Transactions involving property will usually be subject to legal enquiries at an early stage to determine various characteristics of the property, including whether it has been opted to tax or not. Establishing this ahead of completion is key to determining (and agreeing) the VAT treatment of the transaction.

Once notified to HMRC, an OTT will usually be valid for at least 20 years – plenty of time for memories to fade. Previously, HMRC would acknowledge receipt of the options by issuing a letter to the VAT registration. This acknowledgement would usually be requested as proof of OTT, should the property later be sold.

Changes in personnel and in the business mean that it’s often not known whether land or property has been opted, as records aren’t always maintained or complete. In in these situations, historically, HMRC has provided a service of checking their records to confirm if the property is opted to tax.

What are the changes?

For 2023, we’ll see some changes in the way HMRC will be dealing with OTT notifications and requests for confirming what OTTs are in place.  

HMRC will no longer issue an acknowledgment receipt for an OTT. However, if notification is sent to HMRC via email, an automated response will be sent back; no such response will be received for notifications made via post.

This change may be important in the coming years when the property changes hands and proof of whether it is subject to VAT or not, is required.

Moreover, HMRC will no longer routinely confirm the record of OTTs notified by a VAT registration. The rationale for withdrawing this service is that taxpayers have a legal obligation to maintain records for six years.

From now on, HMRC will only confirm an OTT is in place if:

1. The effective date of the OTT is over six years ago; or
2. You’ve been appointed as a Land and Property Act Receiver, or an Insolvency Practitioner to administer the property in question.

What do I need to do?

This change is a reasonable position for HMRC to take and will ease some of the burden on HMRC’s resources. However, we can foresee land and property transactions potentially being delayed whilst proof of the VAT liability is looked for and agreed by both parties.

Currently, the detailed acknowledgement provided by HMRC is seen as the gold standard for proving an OTT has been made. Therefore, accepted practice will need to change for future transactions as (at best) an email confirming receipt by HMRC will be the only document generated.

Likewise, records showing when an OTT has been notified will need to be more assiduously maintained as, in most circumstances, HMRC will no longer provide the failsafe of communicating what their records show.

If you’d like to discuss this in more detail, please get in touch with your usual Larking Gowen contact. You can find contact details in the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Gillian McGill