Changes to HMRC Option to Tax process


The option to tax land and property is a mechanism that allows sales of land and rent charges to be made liable to VAT.  Demonstrating that an option to tax has been made can be important.  A property purchaser may require proof before paying VAT or a seller may require proof that the purchaser has opted to tax and notified HMRC before agreeing that the sale is outside the scope of VAT as the transfer of a property rental business as a going concern (TOGC). The obligation to demonstrate the making and notification of an option to tax will usually be written into Sale & Purchase agreements.

Historically demonstrating that an option to tax has been made has been relatively straightforward insofar as when HMRC has been notified of an option to tax it has issued an acknowledgement letter confirming that an option to tax is in place, usually within 30 days of the notification being made. However, HMRC are currently taking a significant amount of time to process and issue acknowledgement letters.  Typically it is the provision of that acknowledgement letter that is written into the contract between the seller and the purchaser.   There has never been a legal obligation for HMRC to issue such letters but as it has issued them as a matter of practice since the option to tax was introduced lawyers dealing with land sales assume that such a letter will be available.

What has changed

HMRC has adopted a 6 week trial starting at the end of May 2022 (but not widely publicised) during which it will issue a letter acknowledging receipt of an option to tax notification rather than an acknowledgement that the option to tax is valid, bearing in mind that there are conditions that mean that in some situations a taxpayer cannot opt to tax without HMRC approval and (even when such an approval is not required) a technical deficiency in the process may invalidate the option.  This change in policy will allow HMRC to issue acknowledgement letters with limited checks and reduce the admin burden on HMRC, bearing in mind that there is a huge backlog of unacknowledged options to tax leading to delays that disrupt commercial activity.  Whether the trial will be extended remains to be seen, but unless there are significant objections we think it likely that it will be.

What impact will this have

The immediate impact will be on contract wording.  There is little point in a clause in a Sale & Purchase agreement that cannot be complied with because the document that a seller or purchaser has undertaken to obtain/provide does not exist.  It will be important that any clause references an obligation to provide evidence of an “HMRC acknowledgement of receipt” rather than an “HMRC acknowledgement that an option to tax has been accepted” .  Where contracts are already in place, but not complete, then it will be for the lawyers to decide whether the revised format of HMRC’s acknowledgement will suffice or HMRC will need to be pushed to provide more.

In the long term more thought may need to be given to the due diligence associated with the option to tax.  HMRC is correct that the law does not place any significance on the acceptance letter it issues, for example when a purchaser notifies a valid option to tax to secure a TOGC then that particular TOGC condition is met irrespective of whether the purchaser holds a letter from HMRC confirming its acceptance of a valid option.  However, if HMRC is not confirming its view on the validity of the option to tax then the seller may wish to carry out additional investigations to satisfy itself on the point.  VAT liabilities arising from land transactions tend to be for significant sums and someone that pays and reclaims VAT that should not have been charged or fails to charge VAT in the mistaken belief that a sale is a TOGC could at a later date face a significant VAT liability.

Our view

We do not have a strong view on this change insofar as (with appropriately worded contracts and adequate due diligence/warranties) there is no reason why it should be disruptive.  In fact, if acknowledgements of HMRC’s receipt of an option to tax notification can be issued quickly this may deal with the significant problems that HMRC’s backlog is causing.  Our main problem with the change is that HMRC did not announce the trial (still has not done to other than a very limited audience).   The commercial problems that the lack of an advance warning (or any notification) of this policy change may cause was raised with HMRC during the Joint VAT Consultative Committee at its meeting on 15 June 2022.   HMRC has undertaken to consider this – although it is now a little late!

If you do require help with any current or prospective property transactions on which this may present an issue please let us know.  Dean Carey represents the ACCA on the JVCC and having raised the matter with HMRC during the meeting on 15 June 2022 anticipates being kept in the loop on any further developments in HMRC policy.