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Property Tax Bite - VAT - Changes in processing options to tax

The basic rule, albeit subject to numerous exceptions, is that a sale or lease of a property is exempt from VAT.

The most commonly encountered exception to that rule for non-residential property is where the person making the supply has opted to tax the relevant property for VAT purposes, resulting in the supply being subject to VAT at the standard rate of 20%.

Whether or not a seller or landlord has opted to tax is therefore a very important question on many transactions, e.g. to determine:

• Whether the sale price is subject to VAT;
• Whether the buyer must pay SDLT on VAT in addition to the “base” consideration;
• Where the transaction is capable of being a transfer of a going concern (TOGC) and so outside the scope of VAT, what requirements the parties will need to comply with to secure TOGC treatment; and
• Whether there’s any potential concerns over the seller’s / landlord’s option to tax being disapplied under certain anti-avoidance or other rules.

HMRC have historically issued letters acknowledging that options to tax have been made. However, from 1 February 2023, HMRC has confirmed that it will no longer issue such letters.

As a result of this, it is recommended that from 1 February at the latest, all options to tax should be notified to HMRC by email (to optiontotaxnationalunit@hmrc.gov.uk). HMRC have confirmed that an automated response will be issued, which will serve as evidence of the date of notification, and that no other response will now be issued. HMRC have also requested (so this will appear in the automated response) that the subject line of the notification email includes the property address (including postcode) and the effective date of the option to tax (which in practice can be up to 30 days prior to notification).

You may also know that it was possible to write to HMRC to seek confirmation of whether an option to tax had been made by a certain person over a certain property. HMRC are also going to stop responding to such requests, save where:

• the effective date of the option to tax is likely to be over 6 years ago; or
• the person requesting has been appointed as a Land and Property Act receiver, or an insolvency practitioner, to administer the property.

Accordingly, the email auto-response from HMRC, which will be the only confirmation of notification of the option to tax available in most cases going forwards, should be retained safely for at least 6 years (and preferably longer, given options to tax are in most cases only potentially revocable after 20 years as a minimum).

Finally, it is possible to get HMRC to accept a belated notification of an option to tax in certain circumstances (including that a decision to opt has been taken), i.e. effectively an agreement by HMRC that the taxpayer made the decision to opt in the past but failed to notify the option to tax in the required 30 day window. HMRC have said that these changes on 1 February 2023 will not affect how it handles applications for belated notifications.