Background
On the back of facing an unprecedented backlog of unprocessed OTT notifications caused primarily due to Covid-19 disruption, HMRC have not unsurprisingly looked to consider their options over the past 12 months when it comes to the length of time it takes to review, process and communicate responses (i.e. written acknowledgements) to OTT notifications.
Whilst HMRC’s first policy announcement was to effectively streamline the process i.e. rather than undertake detailed checks on the information provided (including checking the validity of land registry title numbers), they would provide a simple acknowledgement regarding the land or building/s opted and the effective date. For a variety of possible reasons (backlogs weren’t being cleared, time taken for HMRC to respond not reducing or perhaps taxpayer antipathy towards the new process), HMRC have now announced further, more radical changes much more likely to have unintended but important consequences for taxpayers seeking certainty of VAT treatment when undertaking real estate transactions.
The Changes
On 13 January 2023, HMRC announced Revenue and Customs Brief 1 (2023): changes in processing option to tax forms by the option to tax national unit – GOV.UK (www.gov.uk) a number of important changes to the way in which they will process OTT notifications going forwards.
From 1 February 2023, HMRC will stop issuing OTT notification acknowledgment letters. Indeed, HMRC are under no legislative requirement as it’s only the notification itself that is required by law. Options which have been notified to HMRC before 1 February will still receive a standard OTT receipt letter (confirming that the OTT notification has been received and recorded). However, with effect from 1 February 2023, OTT notifications should be sent by email to: optiontotaxnationalunit@hmrc.gov.uk including in the subject line the property address and effective date of the notification. In reply, HMRC will only provide an automated emailed response confirming date of receipt. It is important that the automated response received from HRMC is retained for the records of the person opting. Notifications not sent by email will not receive an acknowledgement of receipt.
At the same time and possibly of more consequence, HMRC also have announced they will no longer confirm the existence of an OTT on a particular property, unless the OTT is likely to be more than six years old (six years being the usual period that a taxpayer must retain VAT records) or the request is made by a LPA receiver or an Insolvency Practitioner administering a property in question.
Impact and recommendations
Unless a business is prepared to wait a further 6 years to find out whether it has opted for one (or more) properties within its portfolio, it would seem prudent to act and submit a request before 1 February 2023. This would seem especially sensible if there is the possibility that the business will sell or sub-let a property within the next few years.
Finally, it would seem plausible for VAT commentators to predict that because of HMRC’s change in policy, a significant increase in uncertainty in relation to the correct VAT treatment of commercial real estate transactions will arise (ones which depend on an OTT). A natural consequence would be an increase in contractual protections being negotiated between the parties. In this environment, buyers may consistently seek out VAT, penalty and interest indemnities should an incorrect VAT treatment be applied by a vendor based on a vague assumption (but with no proof at hand) of whether an OTT was validly exercised.”
