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Opting to tax…just got a little less taxing (but a bit less certain)!

As many of you will know, dealing with HMRC can be frustrating at times, usually because of the long delays experienced and the difficulty in contacting anyone.

Well, either as a tax simplification measure or (cynically!) to help with their workload, HMRC has just announced that from 1 February 2023, they will no longer issue VAT option to tax (OTT) notification receipt letters.

Land is usually exempt for VAT purposes but is often opted to tax by landowners to allow them to recover input VAT incurred in connection with it, for example on professional fees or construction works. When an opted property is sold, VAT will be payable by the purchaser unless the transaction is treated as a “transfer of a going concern” (TOGC) which will usually be the case if the property is subject to tenancies and there is an ongoing “letting business” and the procedural requirements are met.

One of the requirements for the sale of an opted property to be a TOGC is that the buyer also needs to opt to tax the property. That is before there is a supply of the property to the buyer for VAT purposes. There is also a requirement for the option to tax to be notified in writing to HMRC before the relevant date. This is usually done online with an automated email response being received when the notifications are submitted. However, in addition, HMRC currently also send a letter to the opting party to acknowledge that the notification has been made, commonly called an “acknowledgment”. It is this final acknowledgment that is now being dispensed with.

Sale contracts often require buyers to provide sellers with a copy of the acknowledgment as soon as received but these provisions will now need to be changed since one will no longer be available. Instead, sellers will need to just rely on: (a) the warranties from the buyer in the contract, (b) the copy OTT and registration forms provided by the buyer and (c) the HMRC automated email response. This change is being made by HMRC on the basis that responsibility for ensuring that the OTT is valid, and that the notification is correct is with the opter. Given the potentially large ramifications of a transaction not being deemed a TOGC, this change may be of concern for both sellers and buyers.

HMRC will also cease from the same date to respond to requests about the existence of an OTT on a particular property unless either (a) the effective opted date is likely to be over six years ago or (b) the person making the request has been appointed as a receiver under the Law of Property Act 1925 or as an insolvency practitioner to administer the property. Businesses are required to retain VAT records (including OTTs) for at least six years. Usually, most business will retain them for longer than that since evidence of an OTT will usually be required if a property is sold, but this latest change means that taxpayers may wish to check their records and also consider seeking confirmation from HMRC of an OTT before 1 February 2023 (particularly in relation to transactions which are between exchange and completion at that date).

We would be happy to provide further guidance on this so please feel free to contact the author who can put you in touch with our Tax team.

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