Important changes to HMRC’s Option to Tax process

Supplies of land and buildings are usually exempt, with no VAT recovery, but a business can opt to tax the supplies of land and/or commercial property.

Opting to tax means that any VAT incurred in relation to the land can be recovered but VAT must be charged on any rent, lease or sale of the land.

There are two stages to opting to tax;

1. Deciding to opt and
2. A business must then notify HMRC of that decision.

Changes

From 1 February 2023, HMRC will no longer provide a written receipt or acknowledgement that a business has opted to tax a property. This is a fundamental change as HMRC have been acknowledging options to tax since 1989 and those in the industry have used this evidence when buying and selling properties. From 1 February 2023, any option to tax must be submitted, via e-mail only, and the automated response will be the only receipt or evidence that an option has been made. This e-mail acknowledgement should be retained along with the notification e-mail and any of the attached documents (VAT5L, 1614 form, Land Registry plan and title). Care should be taken when buying a property after the changes and it is advisable that the original Option to Tax form is checked to ensure that HMRC could not refuse the application, because silence from HMRC is effectively de-facto approval.

Additionally, once an option to tax is made, after the initial six month ‘cooling off’ period, it is in place for 20 years so it is not uncommon for a business to be unsure whether an option was made. Previously, a business could contact HMRC to request copies of any notifications. From 1 February 2023, HMRC will only provide this if the effective date is likely to be over six years or the request is made by an LPA receiver. When in doubt it is therefore advisable to assume any option to tax is likely to be over six years old!

Opting to tax when registering for VAT

When a business registers for VAT and opts to tax a property, a business can upload all the forms and documents required for an option to tax, however, it is important to note that a business will not receive any Option to Tax acknowledgment so you will have no evidence that HMRC has been notified of any option.

You will still need to send all this information to HMRC by e-mail immediately after submitting your VAT registration applications, including your VAT registration reference number (this will begin with VRS 099) in order to get the automated response referred to earlier.

HMRC has not yet been able to update their guidance regarding this.

If you require further guidance on this change, please email your usual Gerald Edelman contact or speak to our VAT team.