A change for opting to tax on land and buildings

Whilst the default position is that supplies of land and buildings are usually exempt from VAT (the sale of the freehold interest in new or partly completed commercial buildings excepted), landowners of commercial property will often choose to opt to tax their property holdings. If the sale of any commercial property where an option to tax (OTT) has been made by the seller is to benefit from treatment as a transfer of a going concern (so that VAT isn’t payable on top of the purchase price), the seller will need to be sure that the buyer validly notifies HMRC of its OTT in respect of the property on or before the relevant date. Tenants and buyers will usually also ask to see evidence of the landowner’s OTT, if they are going to be expected to pay VAT on their consideration given for the lease or purchase of the property.

Until 1 February 2023, due diligence has usually involved sight of both the OTT and the corresponding acknowledgement letter or receipt letter from HMRC. However, a change in HMRC procedure means that any person who opts to tax a property will not receive an HMRC acknowledgment letter or receipt letter.

New rules

From 1 February 2023, HMRC has ceased to issue OTT notification receipt letters and instead, provided that the OTT is notified by email, HMRC will send an automated email response. In addition, it has stopped processing requests for confirmation that an OTT has been made, save in very limited circumstances.

Consequences

Going forward, a buyer, seller or landlord who has opted to tax on or after 1 February 2023 should not be expected to be able to provide a copy of an HMRC acknowledgment letter as none will have been issued. The only available evidence from HMRC will be the automated email response. It will therefore be critical that any landowner opting to tax keeps both the automated email response and a full record of the OTT itself.

Details of the property address, the effective date of the OTT and the name of the opter should be included in the subject heading of the email when the OTT is notified to HMRC, so that HMRC’s automated response can be used to verify the notification.

Further, if an OTT was made prior to the commencement of the new rules, any landowner who has not retained its own VAT records for six years may now find it difficult to obtain confirmation of the OTT from HMRC. In particular, otherwise than in insolvency scenarios, HMRC will no longer provide confirmations where OTTs were made within the period of six years before the request (that being the period for which VAT records are required to be kept by those registered for VAT).

It is not strictly necessary to have an HMRC acknowledgment – or automated email response – in order for an OTT to have been validly made and notified to HMRC. Provided a copy of the original OTT has been retained and the opter can confirm that it was validly notified to HMRC within the time limit, most parties will be content in practice to proceed with that as evidence. However, if no copy of the original OTT can be located either, this may now cause issues (and delay) when seeking to sell or let a property.

Action required

The message now is to put (and keep) your OTT procedure in order. Going forward, we recommend that all OTTs should be submitted via email (as only electronically submitted OTTs will receive the automated HMRC response). Details of the property being opted, the effective date of the OTT and the name of the opter should be included in the subject heading of the email. A full record of the OTT itself, the notification email and HMRC’s automated reply should be retained safely.

Where an OTT has been submitted in the past, landowners intending to sell or let their property should check at an early stage that they have a complete record of the OTT and should ensure that this is safely retained for the future.  

Christopher Somorjay & Claire France, Hogan Lovells