Potential Future Changes To Option To Tax Process

December 13, 20220

HMRC recognizes that its ability to process notifications for options to tax has taken a significant drop over the past year and there are no signs of improvement on the horizon.

HMRC has recently concluded a consultation with regard to the option-to-tax processes.

The first proposal is no longer confirming the option to tax. The taxpayer would be responsible for notifying their desire to opt to tax (also sometimes referred to as exercising the right to waive exemption). Under current guidelines, the option to tax has to be notified to HMRC but also acknowledged/confirmed by HMRC and it is this confirmation that often leads to frustration.

So the idea is that where the taxpayer notifies their option to tax on a VAT1614A form and they notify by email to (currently) [email protected] then the sender would receive an automated response acting as confirmation. Where the option to tax is notified in writing, HMRC proposes to no longer send an acknowledgement or confirmation.

Will That Work?

Submitting a notification by email certainly seems a good idea and receiving an automated response at least acts as confirmation and receipt of the notification. While such a response does not automatically mean that the option to tax is valid, it does at least confirm it has been submitted.

But if it is sent by post, with no notification, then the taxpayer will not know if the post arrived or got lost. Crucially, often with property transactions, the solicitors acting for both vendor and buyer will insist on proof of an option to tax being submitted. This is especially the case in a situation where the sale falls under a transfer of a going concern (ToGC) and the vendor’s solicitors will want proof the buyer meets the ToGC conditions in order for the sale to be outside the scope of VAT.

On that basis, HMRC’s proposal for an automated email response is good. It gives the applicant proof of submission and, assuming the application has been completed with thought and submitted on time, then there would be little reason for HMRC to object post-submission.

The other wrinkle here is that so often taxpayers forget the notification stage and just default to charging VAT on rental invoices. So for taxpayers who follow the rules and notify first and then charge VAT, these proposed changes remove some of the waiting, but for the multitude of taxpayers who don’t even think about notifying, then the problem remains that a taxpayer is charging VAT but hasn’t actually notified anyone of that. This is what HMRC refers to as a “de facto” option to tax.

HMRC hasn’t commented on how to deal with those types of situations, where the taxpayer would need to submit a belated notification of their option to tax. Presumably, the applicant will receive the same automated response but surely HMRC would want to obtain evidence of this late notification?

Another Option

HMRC’s second proposal is to cease processing requests to confirm the existence of an option to tax.

Currently, where a business wants confirmation of an option to tax, the taxpayer can write or email HMRC and under the promise of a response within 30 working days, HMRC will confirm whether it holds a record of that option to tax or not. Sometimes the response from HMRC can be ambiguous, stating that they do not hold a notified option to tax on the specific property but that does not mean that there isn’t an option to tax on the property, only that HMRC does not hold any evidence. For example, if the option to tax was made 20 years ago, the chances are that HMRC doesn’t hold a record of it.

HMRC’s proposal is that the option to tax forms a part of the trader’s business records and those business records must be retained for a minimum of six years. Therefore, if the option to tax is likely to be more than six years old, HMRC will still accept a request for copy/proof of option.

Difficult To Police

This sounds difficult to police. A taxpayer could submit a request regardless of whether the option was more or less than six years. If HMRC has a record and it is less than six years, is HMRC going to write back to the taxpayer and state they have a record but can’t say what it says because it is under six years ago and therefore taxpayer should have a record already?

Likewise, if the option to tax was more than six years ago then, as we know from experience, HMRC does not always hold a record itself. So while the proposal may reduce the number of requests, it doesn’t necessarily resolve the underlying issue that HMRC does not have the resources to turn these requests around quickly.

At the current time, HMRC takes around three months to give a response. If a response is required urgently then there is a convoluted process involved, clearly designed to reduce the number of interactions, but in itself not a helpful process for those who genuinely want clarification.


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