EARLIER THIS YEAR, His Majesty’s Revenue and Customs (HMRC) implemented a set of pivotal reforms in the UK VAT system, especially in regards to the option to tax notification process. Primarily focusing on taxation of land and buildings, these alterations have transformed how businesses fulfil their VAT obligations.

In today Shipleys VAT tax brief, we will look at the details of these important changes, briefly analyse their implications on your business, and offer tips to ensure compliance.

Understanding the Option to Tax Concept

The option to tax allows a business to render what would typically be an exempt supply, such as the sale, lease, or rental of a commercial property, subject to VAT. As a crucial VAT planning tool, it permits the recovery of VAT incurred on commercial property. This decision, usually applicable for 20 years, often finds its original documentation lost or untraceable over time, leading to ambiguities when it comes to the question of VAT applicability on bought or sold commercial buildings.

2023 HMRC Reforms: Key Changes

From February 1, 2023, HMRC ceased issuing acknowledgments for options to tax. They now only verify their records for previously notified options in limited circumstances (according to Revenue & Customs Brief 1, 2023). Consequently, businesses must take it upon themselves to validate whether a building has been opted to tax. This shift places more responsibility on businesses and their accountants to maintain valid proof of an option to tax and modify their procedures for submitting option to tax notifications.

To communicate an option to tax, businesses should send a form via email to optiontotaxnationalunit@hmrc.gov.uk. An automated email response will serve as a receipt of this notification. It’s critical to retain this response as a proof that an option to tax has validly been made and notified to HMRC.

The Importance of Record Keeping

The change potentially complicates the provision of an option to tax evidence, especially considering the occasional glitches in the new automated receipt system. Therefore, it is advisable to modify contractual wording to accommodate HMRC’s decision to stop formally acknowledging options to tax as this can lead to transaction delays.

Situations such as sellers confirming their entitlement to charge VAT, purchasers confirming their option to tax for VAT-free TOGC treatment, due diligence reviews of VAT accounting, or VAT inspections might confront challenges due to the lack of formal verification from HMRC.

To counter possible complications, businesses should establish stringent processes for keeping detailed records of options to tax notifications and the corresponding automated email responses. Furthermore, considering the option to tax status early in a transaction can mitigate potential delays.

Should you need any assistance, are considering purchasing or selling a property that has been opted to tax, or want more information about the recent changes in UK VAT regulations, please call 0845 862 3412 or email info@shipleysvatsolutions.com.

Please note that Shipleys VAT Solutions do not give free advice by email or telephone.