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HMRC Changes to the Option to Tax

Date: 28/04/2023 | Real Estate, Residential Development

What is an Option to Tax?

The sale of land and property is typically exempt from VAT liability, however in some circumstances this exemption can be waived through notification to HMRC of an “option to tax” (“OTT”).  Sellers and/or businesses may opt to tax, to make what previously would have been considered an exempt supply taxable for VAT purposes.  This allows VAT registered businesses to recover VAT on related costs.

What used to happen?

Before the changes were introduced on 1 February 2023, a notification was made to HMRC which would be subject to a series of checks.  If verified, HMRC would validate the OTT and send a receipt letter both confirming that the OTT notification had been received and recorded by HMRC.

What happens from 1 February 2023?

HMRC will no longer issue VAT OTT notification receipt letters.  The only official confirmation available is the automated response received from an email submission of the OTT notification.

No HMRC verification process will take place, and the OTT will no longer be validated by HMRC.

HMRC is also no longer going to respond to requests to confirm the existence of an OTT unless the OTT was made more than 6 years ago, or the request is from an insolvency practitioner.  This is an attempt by HMRC to decrease taxpayer reliance on HMRC, and correspondingly increase efficiency in other areas of their remit.

What should you do now?

Moving forward, anyone submitting an OTT notification to HMRC should where possible do so via email (E: optiontotaxnationalunit@hmrc.gov.uk).  A PDF copy of the submitted OTT notification form and the automated response received from the HMRC mailbox should be saved and kept for your records.  The date included on HMRC’s automated response will now be considered the date that HMRC were notified of the OTT and replace the previous dated notification receipt letter.

Although sending the notification via recorded delivery does provide for tracking details, HMRC will not send any confirmation of receipt to mailed submissions, and tracking marked as ‘delivered’ will not suffice for the purposes of confirming receipt at HMRC.

If you have any concerns or queries about the process of notifying HMRC of an OTT, contact a member of our Commercial Property team.

The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.

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