Consider Your Options: HMRC will no longer confirm if a property has been opted for VAT

From 1 February 2023, HMRC will no longer provide answers to questions over whether it holds an option to tax for a property, with some exceptions. Going forward, taxpayers will need to satisfy themselves as to the validity of any option to tax and retain their own records accordingly.

Proving an option to tax

Pre-1 February 2023, an option to tax a property would be reviewed by HMRC, queried if necessary, and then acknowledged. This acknowledgement would be taken by third parties as official evidence that VAT was payable in relation to that property (e.g. for the purposes of including VAT on a sale of the property, or where charging VAT on rental payments by a tenant).

What’s changing?

HMRC will no longer review or provide an acknowledgement to taxpayers of the option to tax; it is now for the taxpayer to determine whether it is a valid option to tax and to keep accurate records.

HMRC will also no longer confirm whether it holds a record of an option to tax in relation to a property, with the following exceptions:

• The effective opted date is likely to be more than six years ago; or
• You have been appointed as a Law of Property Act receiver or an insolvency practitioner to administer the property in question.

If an option to tax is submitted by email, HMRC say that it will generate an automatic receipt. Together with evidence of the option being sent, this receipt will form the new ‘package’ of evidence which a property owner must show to demonstrate that a property has been opted. HMRC allows options to tax to be submitted by post, but it is not clear what evidence of receipt would be provided in those circumstances.

Best practice when opting to tax

For future options to tax, the best advice is to send the form to HMRC’s email address to ensure you get an automatic proof of receipt. You should also ensure you retain a full record of the covering email, the option to tax and all documents submitted with the option (including any plans).

Why is this so important?

It is crucial for a seller of a property to ensure a full pack of VAT information is available before the start of the transaction. If the buyer cannot satisfy itself that the property has been validly opted (e.g. because of missing paperwork), it may refuse to pay any VAT which the seller wishes to charge. At best this could lead to delays in the transaction and, far worse from the seller’s point of view, could result in a buyer looking to push the VAT risk onto the seller through contractual warranties and indemnities. Any investor looking for a clean sale should ensure that it removes this potential stumbling block by: (i) checking its option to tax paperwork with its professional advisers at the time of submission and (ii) keeping full and accessible records of the subsequent option and supporting documents to avoid any unexpected issues down the line.