Andrew Needham looks at what happens when a business fails to notify HMRC of its option to tax at the correct time.
When a business ‘opts to tax’ it decides to charge VAT on the rental or sale of commercial property in order to recover the VAT on its purchase, construction or refurbishment.
The legislation states that a business should notify HMRC within 30 days of opting to tax a commercial property, using the form VAT1614A. Quite often, businesses forget to do this and claim back the VAT on the purchase and charge VAT on the rents without notifying HMRC. This can cause problems going forward.
Belated notification
The legislation specifically allows HMRC to accept a belated notification of the option to tax. Opting to tax is a two-stage process; deciding to opt to tax, and then notifying HMRC. Naturally, HMRC wants to make sure that the business really did opt to tax when it said it did, to make sure it doesn’t claim back VAT it’s not entitled to, because backdating an option to tax is not permitted.
HMRC’s guidance states that they should be satisfied that the option to tax really was exercised when the business says it was, but in reality they can make things quite difficult.
In theory, a business should be able to provide the evidence that it has opted to tax by showing that output tax has been charged and accounted for and that the relevant input tax has been claimed.
When making a belated notification of the option to tax, as well as sending in the VAT1614A, a business should send in a covering letter explaining why the notification is late, as well as copies of the rental invoices and an audit trail showing that the VAT has been paid, along with any relevant purchase invoices.
One of the main instances when businesses forget to notify their option to tax at the correct time is when they purchase a building that needs refurbishment, and only notify HMRC when the refurbishment is complete.
Example: HMRC comes calling
A business buys a rundown property and is charged VAT on the purchase. It reclaims the VAT on its VAT return and starts a refurbishment of the property that lasts six months. It reclaims the VAT on the building work as it goes along.
As the business is getting repayment of VAT, HMRC comes out for a visit to see why. They see that VAT has been reclaimed but no option to tax has been made, so disallow the input tax reclaims.
The business stated that it was going to send in the form when the work was complete and they started advertising for tenants. HMRC responded that the option to tax can only be made from a current date and the business can’t have the VAT back on the purchase or refurbishment of the property.
As there are no tenants yet, there is no output tax to show HMRC. The business should send them any correspondence or e-mails that mention opting to tax – for example, advice from the accountant – to show intent.
HMRC’s guidance also states that a signed declaration from a director/proprietor/partner of the business stating that it was always the intention to opt to tax but that they didn’t realise it was so time critical is acceptable to them.
Practical Tip :
If you have forgotten to tell HMRC of your option to tax, let them know as soon as possible and send evidence that tax has been accounted for properly. If you can’t do this, send correspondence or a declaration showing the intent to opt to tax.
