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Changes to HMRC’s processing of option to tax

Olivia Larson, Assistant Manager, VAT and Customs Duty Services
20/01/2023
Buildings in sky

From 1 February 2023, HMRC will no longer acknowledge options to tax (OTT) notifications they receive. They may also refuse to confirm whether they have a record of an option to tax having been made in some cases. This may cause uncertainties in many property transactions.

Opting to tax is a two stage process; the first stage is making the decision to opt, and the second stage is to notify HMRC of the decision in writing. HMRC normally expect a business to make their notification within 30 days of their decision to opt. Permission is not normally needed from HMRC, however, certain cases do apply in which written permission must be obtained from HMRC in order to opt to tax.

Whether the OTT has been properly exercised is critical in most commercial property transactions. For an OTT to be valid, it needs to have been notified to HMRC. To date, HMRC has issued acknowledgements of these notifications, which would often be requested by the vendor or purchaser in order to provide evidence that an option to tax had been made. Where an owner could not find an acknowledgement on their files, but was concerned that previous management may have opted to tax, they could ask HMRC to check their records.

What is changing?

From 1 February 2023, HMRC will stop issuing OTT notification acknowledgements. This comes after a trial period was tested in May 2022 in which HMRC stopped verifying OTT notifications altogether. Prior to May 2022, HMRC were carrying out checks to OTT notifications and an acknowledgment was sent to a business to certify that HMRC had accepted the OTT notification.

HMRC may also stop processing requests confirming the existence of an OTT unless the following conditions are met:

  1. the effective opted date is likely to be over six years ago
  2. if you have been appointed as a land and property act receiver, or an insolvency practitioner to administer the property in question.

Importance

Without HMRC’s validation on the notification, the opter is at higher risk of having an invalid OTT. Some examples of where mistakes can be made and result in an invalid OTT are the following:

  1. a property is about to be sold with VAT added to the sale but the land registry number does not match up with what has been put on the notification. The OTT is considered invalid
  2. the assistant finance director is signatory on an OTT notification. HMRC do not accept the assistant finance director as an authorised person and therefore the OTT is considered invalid.

In the past, HMRC may have queried these notifications and a fresh notification could have been made. Now the issue may only come to light when the property is sold. Where the OTT is invalid, the supplies being made will remain exempt from VAT. It is therefore essential that information is being thoroughly checked before submission. HMRC provide a list of who they accept as authorised signatories.

Contracts may include wording which states that an OTT notification acknowledgement will be provided as proof that land, or buildings, have been opted. Following 1 February 2023, contractual wording will need to be amended in order to reflect HMRC’s change in process.

When making the decision to OTT a property, it is imperative all documents in relation to the notification are kept. When an OTT notification is emailed to [email protected] an automated email response will be received. This automated email response will replace the OTT notification acknowledgment and should be kept as record for at least six years. The date on the automated email response will confirm the date HMRC has been notified.

We are sometimes asked whether there is a central database of OTTs which the public can access and this does not exist. Unfortunately, this change to HMRC’s process is a step further away from such a repository and has the potential to be a cause of greater confusion.

Further information

Please get in touch with Robert Marchant or your usual VAT contact if you would like to discuss this further.

Insights

Time limit for notifying an option to tax has returned to 30 days from 1 August 2021, the ability to sign these forms electronically is now permanent.
We look at what has changed with the temporary extension and provide our recommendations.
As plans and objectives for 2023 are formulated, this article looks forward to what could be in store for UK VAT in the new year.
We outline how the new rules replace the existing VAT default surcharge regime and how the new system will operate.
Time limit for notifying an option to tax has returned to 30 days from 1 August 2021, the ability to sign these forms electronically is now permanent.
We look at what has changed with the temporary extension and provide our recommendations.
As plans and objectives for 2023 are formulated, this article looks forward to what could be in store for UK VAT in the new year.
We outline how the new rules replace the existing VAT default surcharge regime and how the new system will operate.

Contact us

Robert Marchant
Robert Marchant
Partner, VAT and Customs Duty services
London