HMRC making significant changes to the option to tax regime

HMRC issued Revenue and Customs Brief 1/23 on 11 January 2023. In the brief, HMRC have confirmed that they will make sweeping changes to the option to tax regime from 1 February 2023.

• They will not issue an acknowledgement of an option to tax.
• In most cases, they will not provide replacement acknowledgements for submissions within the last 6 years.

Current position

Although the supply of property is typically exempt from VAT, many land or property owners may opt to tax their properties, requiring VAT to be charged on both rent and at the point of sale. This option to tax allows recovery of VAT on property costs which would otherwise be lost.  

Once you decide to opt to tax, you must submit a written notification to HMRC. HMRC will provide a written acknowledgement of your option to tax. HMRC’s acknowledgment of an option to tax is of particular importance when you take on new tenants or decide to sell. If you wish to charge VAT, your tenant, buyer, or conveyancing solicitor will routinely ask for proof of a valid option to tax.

What will change?

HMRC have announced that written acknowledgements of options to tax will no longer be provided after 1 February 2023. Your only proof will be an automated receipt from HMRC, and this will only be available for submissions by email.

HMRC have instructed taxpayers to send an option to tax notification by email to: [email protected] and to include the following information in the subject line of the email:

• property address, including postcode
• effective date of the option to tax notification

The automated response will have the date when the notification was received by HMRC which you should keep for your records.

HMRC have confirmed that a notification sent any other way than by post will not get an acknowledgement or receipt.

In addition, HMRC will no longer issue replacement acknowledgements if the option to tax was made within the last six years, unless the request is from an appointed LPA receiver or insolvency practitioner.

If your option to tax was likely to have been submitted more than six years ago or you are an LPA receiver or insolvency practitioner, your request for a replacement acknowledgment letter must contain the following details:

• name of the business or person who opted to tax the property.
• VAT registration number (if applicable).
• full address of the land or property in question, including postcode.
• effective date of the option to tax, if known.
• date you first charged VAT on the opted land or property.
• date the property was either acquired or a loan was taken out (or both) by the opter on the relevant property.
• If you have a VAT group registration number, you will need to give the VAT number linked to the relevant option.

What could this mean for property transactions?

We have seen examples of property sales being delayed or derailed completely due to the option to tax confirmation not being available. We would therefore recommend you maintain an “option to tax register” for all real estate owned by your business.

If you are a buyer or a tenant, you may need protection in your lease or sale agreement against incorrectly charged VAT. If HMRC dispute the existence of a valid option to tax by the landlord or the previous owner of the property, they will disallow your recovery of VAT.

What should you do?

If you have opted to tax, you should ensure all HMRC acknowledgments are securely retained for future reference.

If you submitted your option to tax within the last 6 years, HMRC may provide a replacement letter if requested before 1 February 2023, there is no time to waste!

If you require a replacement confirmation of your option to tax, please contact HMRC’s Option To Tax Unit, or send an urgent enquiry to our Indirect Tax team who will be pleased to assist.