Real Estate Blog: Updated tax notification process. What's changed?

Property transactions are mostly exempt from the VAT regime. However, this means that VAT incurred on any associated property works and fees cannot be recovered. Opting to tax a property allows the person opting to treat certain transactions as standard-rated for VAT purposes, thus enabling recovery of the incurred input tax on costs.

If a taxpayer wants to exercise an option to tax (OTT), they need to notify HM Revenue and Customs (HMRC) by submitting a notification form to them either by post or email. HMRC’s previous practice was to send an acknowledgement letter on receipt of the notification form. The taxpayer could then retain both the notification form and acknowledgement letter as a means of evidencing their OTT.

However, as from 1 February 2023, HMRC has stopped issuing such acknowledgement letters. Instead, HMRC will now send an automated email response confirming receipt of an OTT notification that has been submitted to HMRC electronically (by email to optiontotaxnationalunit@hmrc.gov.uk).

No other acknowledgement of an OTT will be issued by HMRC. Therefore, the automated email response needs to be kept by the taxpayer as part of their VAT record together with the notification form to prove that they have opted to tax the property.

Additionally, HMRC has confirmed that from 1 February 2023 they will no longer respond to requests enquiring as to the OTT status of the property unless the effective date of the OTT is more than 6 years old. Any requests for confirmation of an OTT will need to include:

• the name of the business and its VAT registration number;
• the full address of the property;
• the effective date of the OTT;
• the date when VAT was first charged on the property; and
• the date on which the property was acquired and/or a loan was taken out by the taxpayer.

From a practical point of view, the changes mean that businesses need to review their current processes of keeping records of OTT and ensure that appropriate policies, such as keeping an internal VAT register, are put in place to be able to evidence their OTT status. Additionally, further thought should be given as to whether contractual wording needs to be updated to reflect the changes in order to avoid any potential delays to transactions.

If you'd like to discuss the changes covered in this blog, please contact Ksenia Kavtaskin or another member of our Housebuilding and Strategic Land team.