VAT: changes to the way HMRC process option to tax forms

Important changes to the way that HMRC processes option to tax forms come into force next month, which could affect anyone buying or selling commercial land or property in the UK.

From 1 February 2023, HMRC will no longer issue letters confirming that an option to tax notification has been submitted and will no longer respond to most requests to confirm the existence of an option to tax.

Solicitors, land agents and property businesses will be most impacted by the move, as they usually require evidence of an option to tax before they can progress land and property transactions.

What is an option to tax?

An option to tax allows you to convert what would otherwise be an exempt supply of land or property into standard rated supply. The main purpose of notifying an option to tax allows you to recover VAT incurred on related costs.

There are two stages to option to tax:

1. Taking the decision to exercise an option to tax on land or property, and
2. Notifying HMRC of that decision, usually within 30 days of using the VAT1614A form

Historically HMRC carried out extensive checks of the notification and if everything was in order, it would send a letter acknowledging the option to tax.

Changes from 1 February 2023

Following a consultation in 2022, HMRC announced it was implementing two key changes from 1 February this year:

• HMRC will stop issuing option to tax notification receipt letters

When a notification of option to tax is sent to optiontotaxnationalunit@hmrc.gov.uk  you will receive an automated email response. You should keep this automated response for your records. The date on the automated response will confirm to you the date HMRC has been notified. A notification sent by any other means will not receive an acknowledgement or receipt. We will, however, respond if further information is needed.

• HMRC will stop processing requests confirming the existence of an option to tax

Unless the effective option date is likely to be over six years ago, or if you have been appointed as a Land and Property Act Receiver, or an Insolvency Practitioner to administer the property in question.

HMRC says that it is the opters responsibility to make sure the notification of an option to tax is correct and valid and that information forms part of the business record and should be kept for six years.

Background to the changes and consultation

Since May 2022, to process a large backlog of notifications, HMRC no longer carries out extensive checks. Instead of sending a letter acknowledging the option to tax, it has been issuing a letter confirming receipt of the notification.

In November, HMRC consulted a select group of individuals on its proposals to change two areas of processing option to tax forms. These being:

1. To stop issuing option to tax notification receipt letters, but instead provide an automated email response if the VAT1614A is sent by email.
2. To cease processing requests to confirm the existence of an option to tax, unless the effective date of the option is likely to be more than six years ago, or if you have been appointed as a Land and Property Act Receiver or an Insolvency Practitioner to administer the property in question.

As a member of a specialist VAT committee, I raised my concerns to feedback to HMRC about these proposals including several commercial issues I’ve seen since HMRC stopped acknowledging an option to tax.

Many commercial property transactions require sellers to provide evidence of an option to tax and without that, there is a risk that the option to tax is not valid, and VAT is charged incorrectly.

As well as this, if HMRC refuses to confirm the existence of an option to tax, this could delay transactions completing or could result in deals collapsing without specialist VAT advice.

Why does it matter and what next?

These changes matter to anyone involved in buying or selling commercial property or land – including solicitors and agents who, as a standard, require copies of the acknowledgment of the option to tax before they can progress land transactions.

HMRC is not legally obliged to acknowledge an option to tax, however, it has done for many years, and it has become an important document as part of commercial land and property transactions.

Solicitors will need to be aware of these changes as their standard contract clauses will be impossible to agree.

Further discussions?

It is not yet clear if HMRC is open to further discussion about the changes, but there seems to be some unresolved issues raised in the consultation responses.

It has been pointed out to HMRC that the proposals go against HMRC’s principles set out in its Charter Standards of ‘making things easy’ and ‘being responsive.’

One suggestion that has also been made to HMRC is to make information about options to tax available digitally on the VAT services account, where you can already access a VAT registration certificate.

Overall, I don’t believe that the proposed changes will save time or efficiencies for HMRC. In fact, they may have the opposite effect, due to an increased volumes of calls to the helpline when the information required in not provided.

More advice

For anyone looking to notify an option to tax, I would advise that this is sent by email in the future so that you will be sent the automatic receipt from HMRC.

I also advise that you include the opters name and VAT registration number, together with the full address of the property to be opted and the effective date in the subject box, and that you request a delivery or read receipt.

If you need any help with an option to tax, please get in touch – my details can also be found below. Alternatively, a member of the Westcotts team is available for you to discuss your options.