Option to Tax – Belated Notification issues

Think you’ve made an option to tax? Could you prove it though?

That’s been an issue recently, where clients have experienced difficulties in being able to confirm that an option to tax on a building or land had been correctly notified to HMRC at the right time.

Readers are probably familiar with what an “option to tax” actually is and why you take that decision but just in case you are new to VAT, an option to tax is a useful tool in the VAT management toolkit. It can enable what would have been a VAT exempt supply of an interest in land or a building – a freehold or lease – to change VAT liability to become a taxable supply at the standard VAT rate – so 20% VAT charged on top of the value.

Why opt? Making a VAT exempt supply risks blocking VAT recovery on related costs, therefore if an option to tax can be used on the land or building then the supply of the freehold or lease becomes taxable and that opens up recovery of VAT on the costs you’ve incurred.

There are as ever, a range of issues that need to be considered before you actually make the decision to opt to tax – so do take advice on that aspect – but it’s also important to recognise that the actual notification of your decision to HMRC also has a criteria to meet. If you have been charging VAT of rental income for an office or retail unit you let out, what evidence do you have:

• that you’ve actually notified HMRC that you’d made that decision,
• of the date the option was to apply from and
• of the building or land area that the option was to cover?

Having proof that you’ve been charging VAT on the rents is not going to be sufficient evidence that you have “made” an option to tax.

To obtain HMRC’s agreement, at some later date, that your organisation did opt to tax at an earlier date, is where the aspect of a belated notification of an option arises.

You cannot “backdate” an option to tax but you can notify HMRC of a belated notification. Effectively saying – “I did make the decision to opt to tax this site on “x” date 5 years ago – and here is the evidence that the decision was made at that time”. It is providing the evidence that the decision was made at that time which can be the area of concern.

A timely reminder, therefore, for any organisation that thinks it has opted to tax land and buildings in which it has an interest, to make sure that your records hold evidence of writing to HMRC at the time to notify them of your option to tax on that property and that the option was accepted by them 

Failure to have proof of a valid option to tax often crops up in the final stages of a deal to dispose of a site and definitely adds complications – if you need help in this regard do get in touch – emailus@centurionvat.com

For the avoidance of doubt, the content recorded in this news article does not constitute formal advice and we do not guarantee the accuracy of any information provided at the time of reading. It is always recommended that you seek professional advice before acting on any of the news articles or information included.