Option To Tax – HMRC trial change to acknowledgement process

On a related matter, it appears that HMRC are trialling a change to their Option To Tax acknowledgment process.  Anybody dealing with HMRC’s Option To Tax Unit will know that they currently have significant backlogs to deal with.

Although an HMRC acknowledgment is not legally required for an Option to Tax to take effect, it typically provides comfort on the VAT position for lawyers dealing with property transactions. HMRC have announced that they are trialling a streamlined acknowledgment process so that the acknowledgment is just an acknowledgment, and no more detailed checks are carried out on the validity of the option to tax.

Because an HMRC acknowledgment is not legally required, although it puts the onus back onto the taxpayer to make sure the option to tax is valid, this appears to be a reasonable move, especially if it helps clear HMRC’s backlog.

We have long been aware that acknowledgments are not a legal requirement, of course, so have helped many clients satisfy lawyers of this where there is no record of an acknowledgment (and this will not change). The real issue in the absence of an HMRC acknowledgement (and often when an acknowledgment has been received) is the absence of the taxpayer’s notification because this is typically the most important document because it contains much more information about the property being opted than HMRC’s acknowledgment letter ever does.

We therefore regularly help clients understand their record-keeping requirements (often more generally in addition to the option to tax) but the importance of keeping copies of all decisions and notifications made in relation to the VAT profile of property assets cannot be overstated.

We recommend that all taxpayers with non-residential property assets review their related VAT paperwork, particularly if an option to tax has been made (or transactions have been treated as though an option to tax has been made, e.g. VAT has been charged on rents).

This change in HMRC’s process comes close after a recent case that found that a taxpayer’s claim for VAT Bad Debt Relief failed because the records kept were not sufficient in HMRC’s opinion to validate the claim, so more proof if needed of how important it is to keep appropriate VAT records.

We would be happy to discuss the above with you or your clients. A stitch in time saves nine, as they say.