Changes to VAT option to tax procedures

HMRC has made some significant changes to the way it will deal with VAT options to tax, with effect from 1 February 2023. Clients and advisers will need to note these, and update their procedures when submitting option to tax notifications accordingly.

For an option to tax in respect of a property to be valid, it must be notified to HMRC within 30 days, and prior to the ‘relevant date’ (usually before the creation of a tax point) if an acquisition would be subject to VAT, and the intention is for an acquisition is to be a VAT-free Transfer of a Going Concern (TOGC). Prior to 1 February 2023, HMRC would have formally ‘acknowledged’ the option to tax after carrying out checks, and would also confirm the existence of any options to tax notified to them, if requested.

From 1 February 2023, HMRC will no longer issue an acknowledgment of an option to tax, and will only check its records for options to tax previously made in limited circumstances (see Revenue & Customs Brief 1 2023). As long as a notification is sent by email to: optiontotaxnationalunit@hmrc.gov.uk, the sender should receive an automated email response showing the date when the notification was received by HMRC. HMRC advises that the subject line of the email should include:

• Property address, including postcode, and
• Effective date of the option to tax notification.

This automated response should be retained as part of the trader’s records. A notification sent in any other way (e.g. by letter) will not get an acknowledgement or receipt, but HMRC will respond if it requires more information. 

As regards requesting confirmation of whether HMRC has a record of an option to tax made previously, HMRC will now only respond if:

• The effective date of the option to tax is likely to be over six years ago, or
• The sender of the notification has been appointed as a Land and Property Act receiver, or an insolvency practitioner to administer the property in question.

From a practical perspective, these changes may cause difficulties in providing evidence that an option to tax is in place, particularly as the new system is experiencing teething problems, with an intermittent fault resulting in the automated receipt not always being issued. Contractual wording may require updating to reflect the position that HMRC will no longer formally acknowledge options to tax, and it may result in delays to transactions. For example, the following areas could give rise to problems:

• A seller confirming to a prospective buyer or tenant that the seller is entitled to charge VAT on the purchase price
• A purchaser confirming to the seller that it has opted to tax a property in order to obtain VAT-free transfer of a going concern (TOGC) treatment
• A target company on a due diligence review of its VAT accounting confirming the option to tax status of its property portfolio
• A trader confirming to HMRC on a VAT inspection that certain properties have been opted to tax.

In addition, there may be uncertainty as regards whether an option to tax notification is valid because of the lack of HMRC verification, e.g. whether it has been signed by an authorised signatory, or appropriate permissions have been received.

We recommend that businesses put in place robust processes to keep detailed records of options to tax notified to HMRC and the automated email responses. It may be appropriate to maintain an option to tax register within the VAT records of the business. The option to tax position in respect of a transaction should also be considered at an early stage, to avoid delays.

Please contact Marvin Reynolds or Richard Dalton for further information.