If someone owns or acquires a commercial property that is more than 3 years old, and they decide they want to rent it out to tenants, the rental income is exempt from VAT.
This means that the rent is not subject to VAT, but it also means that the owner of the property cannot recover VAT incurred on costs associated with owning the property (such as legal fees, repairs, maintenance, refurbishments and so on).
It is possible, however, to waive the exemption by making what is known as an option to tax (OTT for short). Any such OTT must be notified to HMRC and the normal timescale for sending in a notification is 30 days.
There are strict rules about when you can make an OTT but, once you have decided that it is a good idea, that 30-day clock starts.
CHANGES FROM 1 FEBRUARY
Following a recent consultation, HMRC has announced a number of changes in how it processes Option To Tax documentation. We recommend those affected ensure that they have copies of option to tax acknowledgements. If not they should write to HMRC as soon as possible to request a copy.
HMRC will stop issuing Option to Tax Notification Receipt letters from 1 February 2023
When a Notification of Option to Tax is submitted to email@example.com the opter will receive an automated email response. You should keep this automated response for your records.
The date on the automated response will confirm to you the date HMRC has been notified. Notifications sent by any other means will not receive an acknowledgement or receipt.
Requests to confirm the existence of an Option to Tax
Under the new OTT Charter HMRC will stop processing requests confirming the existence of an Option to Tax, unless under certain circumstances.
Businesses are reminded to keep OTT relating records for 6 years as stated in HMRC’s guidance VAT notice 700/21 (section 2):
- Record-keeping rules for all VAT-registered businesses
- Charge, reclaim and record VAT – keeping VAT records
At Shipleys, we recommend that records relating to an option to tax should be kept for longer than 6 years as we have found that clients sometimes need to still reference them beyond this point.
Keeping the records until 6 years have elapsed after disposal of the property is very sensible. Likewise if an OTT is revoked it is important to retain the records until 6 years after the revocation.
Where HMRC will still check records regarding the OTT of a property
HMRC has confirmed that if a request is made under one of the following conditions, then it will still check to see if it holds a record of an Option to Tax for the relevant property. These conditions are:
- The effective opted date is likely to be over 6 years ago, or
- If you have been appointed as a Land and Property Act Receiver, or an Insolvency Practitioner to administer the property in question.
In these cases, a request to confirm that an Option to Tax is in place on the relevant property must be accompanied by a letter or deed of appointment of your role, otherwise HMRC is unable to assist.
Those making the request will be expected to provide the following details:
- Name of the Business/person who had opted to tax the property
- A VAT Registration Number (if applicable)
- The full address of the land/property in question, including postcode.
- The effective date of the option to tax if known.
- The date you first charged VAT on the opted land/property. The date the property was acquired and/or a loan was taken out by the opter on the relevant property.
FOR MORE INFORMATION
For more details, please talk with your usual Shipleys contact or one of our specialist VAT team – email them at firstname.lastname@example.org
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
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