Changes to the process of Opting to Tax commercial properties

Published by Rupert Moyle on 2 November 2023

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There have been some important changes to the process of Opting to Tax commercial properties over the last year or so. 

This article is a reminder of what appear to have been straightforward changes, of the practical benefits they have brought, but also of the issues our clients are encountering and what they should do to best manage their Options.

For those who are not clear as to what an Option to Tax is, I should initially explain that supplies of land and buildings are normally exempt from VAT, but a person holding or intending to hold an interest in a commercial property or land can opt to charge VAT instead, by formally exercising an “Option to Tax”.  It used to be called the “Election to Waive Exemption”.  An owner or landlord would want to Opt in order to make taxable supplies of the property in question and in doing so to allow VAT on related expenditure, such as on a refurbishment or purchase, to be recoverable from HMRC.  Exemption does not in principle allow for the recovery of VAT on related expenditure.

The prior system for Opting

The VAT legislation around Options to Tax has been in place since 1989 and has legally included a two-stage process for it to be valid; firstly a decision to Opt and then a formal notification of the Option to HMRC.

Historically, HMRC’s officers have reviewed notifications sent to them.  They will have issued queries where they have felt the notification may contain an error or may not be valid, for example because prior permission to Opt may have been necessary, but assuming they have been happy with the Option they have issued a written acknowledgement of the Option to Tax to the taxpayer.  Taxpayers should then have filed their Options for future evidence.

Hence in the past, the system of Opting has included some measures by HMRC to safeguard the taxpayer.

Clearly the process of HMRC reviewing Option notifications and issuing acknowledgments has been resource intensive for HMRC and, where there has been a shortage of staff for whatever reason in the past, this has led to pressures on businesses trying to lease, sell or buy, Opted properties.  Delays may have either disrupted or in some cases scuppered deals.

There has also been a facility for taxpayers to check with HMRC whether an Option has been made by the business previously in respect of a property (e.g. one made by a prior finance director), or simply to obtain evidence of an Option that a buyer’s solicitor will have invariably wanted to obtain for its client.  With records only having to be kept for six years legally, businesses have often had difficult in obtaining such evidence, as after all some Options may have been made over 30 years ago.

So, what have HMRC done to improve turnaround times and facilitate business in this regard?

In September 2022 HMRC  presumably realised that the system would always be prone to issues and also that whilst HMRC had always issued acknowledgements of an Option to Tax, they did not need to from a legal standpoint.  They therefore decided initially to trial only sending out Option receipt letters, removing the checking process at HMRC’s end.  Then, from 1 February 2023, they ceased issuing receipt letters which entirely switched the onus, when Opting to Tax, to the taxpayer and their professional advisers.

The onus for a taxpayer from then on was to ensure:

  • A correct understanding of what can be Opted and where the Option may have no effect;
  • An understanding as to whether – according to a rather complicated set of instructions – an Option requires prior permission from HMRC in order for it to be valid;
  • The accuracy of what is notified to HMRC, as errors can invalidate an Option; and
  • Proof that an Option has been made and notified formally to HMRC

Now, Option forms are emailed to HMRC and it is for the taxpayer or adviser to retain proof that the Option has been submitted, although there should also be a confirmation of receipt email that is returned from HMRC.

What have these changes meant for a taxpayer?

Whilst these changes have increased the speed of Opting to Tax, which is good news, they will likely lead to future issues in my view, which could be substantial given the potential VAT at stake in property transactions, unless a professional adviser is involved in the process of Opting.  Further diligence must be taken, whether or not an adviser is instructed, to ensure all of the points set out above have been addressed.

What about confirming with HMRC if Options to Tax have previously been made?

A common issue is for a client to call us with an urgent request for help where, for example, they are wanting to exchange on a property sale that afternoon, but the buyer’s solicitor has asked for proof of any Option to Tax.  In the past we would have suggested contacting HMRC’s Option to Tax Unit to confirm if there has been an Option or to obtain a copy of the acknowledgement issued, as mentioned above.  But HMRC have changed their policy on assisting in that regard too.

From 1 February 2023 HMRC will no longer provide answers to questions as to whether they hold a record of an Option to Tax unless the effective date is likely to have been more than six years ago.

In announcing this change HMRC have reminded taxpayers that it is their responsibility to hold records of all their tax affairs for at least six years.

This particular change in policy has and will lead to some difficult scenarios, where for example a client needs evidence of an Option to Tax within the last six years.  What to do will require some thought and it may be necessary, with the help of your advisers, to take a view on whether it is likely an Option will have been exercised, and what to do in terms of a transaction.

What does all of this mean for our clients?

Having experienced the latest changes for about 9 months now, for me the important take-aways for clients are as follows:

  • Ensure all aspects of Options to Tax are reviewed carefully before you Opt as these last for 20 years minimum – consider seeking assistance from your VAT adviser;
  • Either ask your adviser to complete the application or ensure that what you intend to submit has been subject to a review to ensure its accuracy;
  • For forthcoming Options to Tax, follow the suggested filing protocol and ensure that you obtain and carefully file the proof of submission of the Option and receipt from HMRC;
  • Review your commercial portfolio’s VAT records and make sure you have copies of Options or acknowledgements. Where there are gaps, seek advice, as it may be possible for example to seek a belated notification of an Option to Tax or to reconfirm an Option; and
  • Inevitably, there will be scenarios where evidence of an Option may not be available for transactions in which case you and your solicitors will need to draft suitable warranties in agreements

Time will tell whether this change in direction by HMRC needs further refinement. It is clearly aimed at reducing the stress on precious resources within HMRC but it does give clients some potentially significant issues.  One could understand there being a period of grace, a warning if you like, of the need to be very careful in filing Options made in the future, but to immediately withdraw a confirmation service for anything Opted within the last six years may well cause real issues.  Perhaps one enhancement of the service would be for HMRC to link Option notifications with the HMRC gateway given that taxpayers already have a digital link to HMRC.

If you would like further information, please get in touch.

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