VAT Options to Tax - important changes from 1 February 2023

The sale or letting of property is often exempt from VAT, but there is a facility to “Opt to Tax” which means that any subsequent transaction will (with limited exceptions, generally for residential buildings) be subject to VAT.

Options to Tax have been around since the late 80’s, and a business selling property or granting a lease over the property might not be sure whether it ever Opted to Tax the land in the past. In appropriate circumstances, being able to check whether HMRC have a record of an Option to Tax can be vital.

The current process is that Options to Tax are notified in writing, so HMRC has a record of it; and HMRC acknowledges the Option to Tax.

Two key changes are being made. HMRC, in Changes in processing option to tax forms - GOV.UK refers to making “refinements…following a period of consultation” to its service.

“After consultation” implies HMRC took account of feedback and “refinement” implies the changes are for the better. I doubt many responses to the consultation supported the changes HMRC were proposing. So what are the changes being made?

1. HMRC acknowledgements when Options to Tax are notified to it

HMRC will no longer send letters formally acknowledging receipt of an Option to Tax notified to it.

If the Option to Tax was notified by email to optiontotaxnationalunit@hmrc.gov.uk HMRC’s systems will produce an automated email response. This response will not refer to the detail of the Option to Tax, e.g. the address/title number of the property or effective date of the Option. It will simply confirm that SOMETHING was emailed to the Option to Tax Unit.

My advice is to make sure that the subject line of the email refers to the business name/VAT Number, and that an Option to Tax is being made over (the property address.)

HMRC will not provide a receipt or acknowledgement for an OTT notification submitted by any other means.

2 Confirming existing OTT notifications

Currently, HMRC will, on request, search its records and confirm whether an Option to Tax was ever notified to it. This is a valuable service if you can wait for HMRC to respond.

But HMRC will no longer search its records except where:-

• the effective opted date is likely to be over six years ago; or

• the request is made by a Land and Property Act receiver or an insolvency practitioner, to administer the property in question.

Even then, HMRC want you to provide detailed information before undertaking a search. Clearly, any information may help narrow down the search.

Initially, HMRC said a key requirement was to confirm that there IS an Option to Tax in place. If you are certain that you have already Opted to Tax the benefit of contacting HMRC will be if you have lost the paperwork, and the tenant/purchaser requires a copy. Clearly, this requirement would be unhelpful if you are asking for a search because you don't know whether or not there is an Option to Tax in place.

HMRC has issued an update, and now seems to be saying that searches can be made if there is uncertainty.

But this requirement is unhelpful if you are asking for a search because you don't know whether or not there is an Option to Tax in place.

HMRC is under pressure to improve its service levels, e.g. to reduce delays in the processing of VAT registrations. However, I can’t see that the above changes will free up huge resources to redeploy elsewhere.

If your business will sell or let property, including property included in a business sale, you will need to be certain on whether VAT needs to be charged.

HMRC’s service reductions after 1 February may make this more difficult. If you are uncertain whether an Option to Tax was made in the past, we can discuss the implications.