Imminent changes to HMRC Option to Tax (OTT) process
The HMRC Option To Tax allows a business to charge VAT on the sale or rental of non-residential property, or in other words, to make a taxable supply from what otherwise would be a VAT exempt supply, allowing additional VAT recovery on costs than would otherwise be the case.
When a taxable person decides to exercise an option to tax on property for VAT purposes, they should notify HMRC. Historically, HMRC would undertake checks on the validity of the OTT and issue confirmation for the taxpayer’s records.
For some time now, HMRC has recognised that its ability to deal with queries and process notifications for OTT has been inadequate and at the back end of last year it concluded a consultation with regard the HMRC Option To Tax process which resulted in some changes being introduced, broadly, HMRC would no longer confirm the validity of an OTT, but would issue a letter confirming that the OTT had been notified.
HMRC have published a policy paper which outlines the refinements to the option to tax notification process from 1 February 2023. The full document can be found here.
What is changing from 1 February 2023?
HMRC has confirmed that it will no longer issue VAT OTT notification receipt letters. From 1 February 2023, when an OTT is notified to HMRC by email, an automated email response will continue to be generated and sent, but no acknowledgement will be provided for OTTs notified by other means.
Taxable persons submitting an OTT might therefore want to consider only notifying an OTT to HMRC by email and retaining HMRC’s automated response with their VAT records as evidence of the notification.
What about existing OTTs?
Businesses are currently required to retain VAT records, including OTTs for six years although it is generally good practice to retain OTTs for longer as evidence of the existence of an OTT will usually be required if a property is sold or leased.
Up to now though, taxpayers have been able to ask HMRC to provide confirmation of the existence of an OTT (with varying degrees of success!).
From 1 February 2023, HMRC will no longer provide confirmation (other than in limited specified circumstances), therefore, taxpayers may wish to check their records and, where necessary, seek HMRC’s confirmation of notification before 1 February 2023 (particularly in relation to transactions which are between exchange and completion).
From 1 February 2023, HMRC will cease to respond to requests about the existence of an OTT on a particular property unless either:
- The effective opted date is likely to be over six years ago.
- The person making the request has been appointed as a receiver under the Law of Property Act 1925 or as an insolvency practitioner to administer the property.
If a request is made as to the existence of an OTT in these limited circumstances, it will need to be accompanied by a letter or deed of appointment as a receiver or insolvency practitioner and include the following:
- 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.
If you need confirmation about the existence of an OTT from HMRC then request this before 1 February 2023.
When submitting an OTT, consider only notifying to HMRC by email and retaining HMRC’s automated response with your VAT records as evidence of the notification.
It is imperative that prior to deciding to exercise an OTT, the taxpayer understands the implications, which are long term and wide ranging, in certain circumstances we recommend that specific VAT advice is sought. Our VAT team can help you understand the VAT implications of a decision to opt, both in the short and longer term. This will help you to mitigate risk, and can create VAT savings, both cash flow and absolute.
If you need further advice please get in touch with Gemma McCaldon-Gower.
The information was correct at time of publishing but may now be out of date.