Do you know if you have opted to tax?
Where proof of an option to tax is needed and time is tight – typically when completing on a property sale – it is not uncommon for a client to call their accountant – often as a last resort – hoping they hold a copy on file. Unfortunately, it is rarely that straightforward and if nobody knows if a property is opted to tax, it is unclear if VAT should be included on that sale.
As advisers, we would look at the history of the property 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 if used by a business, perhaps held for a long time, it is unlikely to have been opted; why would it be if it is not needed?
The seller could choose to charge VAT, but the buyer may not pay the VAT if not satisfied that it has been opted as HMRC may challenge the recovery of VAT by a buyer. There could also be penalties to pay if VAT has been incorrectly charged.
Where proof of an option to tax is needed and time is tight – typically when completing on a property sale – it is not uncommon for a client to call their accountant – often as a last resort – hoping they hold a copy on file. Unfortunately, it is rarely that straightforward and if nobody knows if a property is opted to tax, it is unclear if VAT should be included on that sale.
As advisers, we would look at the history of the property 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 if used by a business, perhaps held for a long time, it is unlikely to have been opted; why would it be if it is not needed?
The seller could choose to charge VAT, but the buyer may not pay the VAT if not satisfied that it has been opted as HMRC may challenge the recovery of VAT by a buyer. There could also be penalties to pay if VAT has been incorrectly charged.
Where time allows, the usual approach would be to write to HMRC and ask if it has a record, but that is now changing.
Confirming the option to tax
HMRC has confirmed that from 1 February 2023 it will no longer provide answers to questions over whether it holds a record of an option to tax unless:
The effective opted date is likely to be more than six years ago; or
You have been appointed as a Law of Property Act receiver or an insolvency practitioner to administer the property in question.
HMRC has reminded taxpayers that it is their responsibility to hold records of all their tax affairs for at least six years. Taxpayers must therefore ensure that they maintain an accurate record of their properties and the option to tax status. If an accurate record is not held or if there is doubt, it may be appropriate to confirm any options to tax to HMRC just in case.
Acknowledgements 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 has always acknowledged this option to tax and it is that HMRC acknowledgement that is used as the evidence of opting, not the notification itself. In providing the acknowledgement, HMRC has also undertaken checks that an option to tax is valid and, where necessary, challenged where deemed appropriate.
However, technically it has never been a requirement for the option to tax to be reviewed or acknowledged by HMRC. In looking for ways to cut its ever-increasing administration burden, it will no longer review or provide an acknowledgement to taxpayers of the option to tax – 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 HMRC has received the notification?
HMRC has confirmed that where notification is submitted by e-mail, 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 e-mail? 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. If a property has been let out and VAT charged to a tenant, the prudent approach would be to confirm the option to tax by belatedly notifying it to HMRC.
Will HMRC respond in these circumstances and do they even need to? If HMRC does not respond, is a recently notified option to tax with an historic date going to cut it with the buyer or its solicitors?
Measures to reduce uncertainty
All of this leaves the taxpayer with uncertainties and ambiguity. Experience has shown that HMRC is not always reasonable in its approach and if it takes a particular point, while a tribunal would look at issues arising using a reasonableness or balance of probabilities test, this can be costly and time consuming. It does not help the taxpayer.
Time will tell whether this approach 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?
Taxpayers need to make sure that they know where they stand. To do this, the following measures should be taken:
Confirm that any option to tax to be exercised is a valid option, either by reference to VAT guidance or seeking professional advice;
Send it to HMRC’s e-mail address to get proof of receipt, or get some alternative proof; and
Keep a full record of any options to tax, with copies of all documents, before it is needed.
Colin Laidlaw is a VAT director at Kreston Reeves
Image © David Cole/Shutterstock
