VAT and Property – do you know if you have opted to tax?

Land and buildings are normally exempt from VAT but for commercial property or land a taxpayer can choose to charge VAT by exercising what is known as the “Option to tax”.  From 1 February 2023, the regime is changing. Here, Colin Laidlaw explains those changes and what they will mean.

Take this scenario: the phone rings at 1600 on a Friday afternoon. A client is completing on a property sale that day and he wants to know whether there is a copy of the option to tax on file.  “Errr – no, don’t you have a copy?”, is the usual response. Naturally the client has already exhausted the usual routes and has asked us a semi-last resort.  No one knows if the property is opted to tax leaving the question of whether the client charges VAT on the sale.

As advisers we would look at the history and if, for example, it is let out and VAT had always been charged to the tenant, it is likely that the property is opted to tax even if not officially notified to HMRC.

But what if it has not been rented out and used instead by the business?

In such cases, it is not likely to have been opted – why would it be if it is not needed?  This seems logical but where buildings have been held for a long time there may be no one in the business who knows whether it was ever let out plus accounting records don’t have to go back that far (and invariably don’t).  Property sales are not automatically subject to VAT so the default would be not to charge VAT.

The client could choose to charge VAT but the buyer may not pay the VAT if he isn’t satisfied that it has been opted and HMRC may challenge the recovery of VAT by a buyer. There could be penalties to pay if it has been incorrectly charged.

If we have time, the usual approach would be to write to HMRC and ask if they have a record, but that is now changing.

What has changed?

 1) Confirming the option to tax with HMRC

HMRC have confirmed that from 1 February 2023 they will no longer provide answers to questions over whether they hold a record of an option to tax unless:

• The effective opted date is likely to be over 6 years ago.
• If you have been appointed as a Land and Property Act Receiver, or an Insolvency Practitioner to administer the property in question.

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.  It would not be unreasonable to expect that the six year point may eventually disappear over time as the new system is embedded.

Taxpayers must therefore ensure that they maintain an accurate record of their properties and the option to tax status.  We would suggest that, if an accurate record is not held, or if there is doubt, it may be appropriate to confirm any options to tax to HMRC (as opposed to opting from a current date), just in case.

2) Acknowledgements from HMRC and how to notify

It has been a requirement for many years that an option to tax must be notified to HMRC in writing (on form VAT 1614A).  HMRC have always acknowledged this option to tax, and it is the HMRC acknowledgement of the option to tax that is used as the evidence of opting, not the notification itself.  In providing the acknowledgement, HMRC have also undertaken checks that an option to tax is valid and, where necessary, challenging where deemed appropriate.

However, technically it has never been a requirement for the option to tax to be reviewed or acknowledged by HMRC and in looking for ways to cut its ever-increasing administration burden, it has now decided it will no longer review or provide an acknowledgement to taxpayers of the option to tax.  They have advised that it is now for the taxpayer to determine whether it is a valid option to tax.

Taxpayers will need to keep a record of options to tax submitted and, where possible, proof that it has been notified to HMRC. It may also be necessary for advice to be sought to confirm that any option to tax is valid.

How does a property owner prove that HMRC has received the notification?

HMRC confirm that where notification is submitted by email an automatic receipt will be provided.  This should, together with appropriate proof of sending, be sufficient to demonstrate this. But what happens if you don’t notify by email?  Is a recorded delivery sufficient?

This has knock on implications. Contracts for sale and purchase will need to be reworded to deal with this, and what happens if it cannot be proved?  Will there need to be warranties in place?  Will the evidence be sufficient?

There are other circumstances where one might write to HMRC regarding an option to tax. In the example earlier where a property had been let out and VAT charged to a tenant, the prudent approach would be to confirm the option to tax by belatedly notifying it tax to HMRC – ie confirming that an option to tax had been made but not notified (which is different to a backdated option to tax).  Will HMRC respond in these circumstances – do they even need to?  If HMRC do not respond, is a recently notified option to tax with an historic date going to cut it with the buyers or their solicitors?

Conclusion

All of this leaves the taxpayer with uncertainties and ambiguity.  Experience has shown that HMRC is not always reasonable in their approach and if they take a particular point, whilst a Tribunal would look at issues arising using a reasonableness or balance of probabilities test, this can be a costly process and many, many months down the line.  It doesn’t help the taxpayer.

Hopefully time will tell whether this approach from HMRC will be refined. It is difficult to see why we still have such an outdated process now that all taxpayers have digital accounts with HMRC.  Why is it not possible to tie up such notifications with the HMRC gateway?  There would be a record of all of them with no debate.  That’s what a commercial business would do if they wanted your custom.

Taxpayers need to make sure that they know where they stand.  To do this the following should be taken:

• Confirm that any option to tax to be exercised is a valid option, either by reference to VAT publications/ guidance or seeking professional advice.
• Send it to HMRC’s email address to get proof of receipt, or get some alternative proof.
• Keep a full record of any options to tax, with copies of all documents etc., before it is needed

Here at Kreston Reeves, our specialist real estate team is ideally placed to assist you with this or any other property related issue. Please contact us today for more information.