Option to Tax notification and TOGC

Tax Question

Our VAT registered client is to buy a currently tenanted commercial property which they will continue to rent to the existing tenant. The seller is VAT registered and has opted to tax and so our client needs to opt to tax before transfer in order for the sale to be a TOGC. However, the seller’s solicitor is asking for proof that my client has opted to tax. What proof can I provide?

Tax Answer

Section 2.3.1 of VAT Notice 700/9, which provides guidance on option to tax in a TOGC situation, advises that the seller, or more usually the sellers solicitor, must be satisfied that the buyer has an option to tax in place by the relevant date of the transfer and the document usually requested is a copy of HMRC’s letter acknowledging receipt of the buyer’s option to tax. 

However, further guidance issued by HMRC at the start of 2023, see link below, confirms that from 1 February 2023, HMRC will no longer be sending any letter confirming receipt or notification of an option to tax.

https://www.gov.uk/government/publications/revenue-and-customs-brief-1-2023-changes-in-processing-option-to-tax-forms-by-the-option-to-tax-national-unit/changes-in-processing-option-to-tax-forms#:~:text=Receipt%20of%20an%20option%20to,to%20tax%20notification%20receipt%20letters.

So where does that leave your client in regard to proving that their option to tax has been notified and that their option to tax ‘in place’ if HMRC are no longer sending out acknowledgement letters?

The first part of the answer is at section 4.2.4 of VAT Notice 742A (Opting to Tax Land and Buildings) which confirms that an “option to tax has legal effect even if HMRC does not acknowledge receipt of your notification”.

Therefore, as long as the option to tax has been notified to HMRC showing the effective date of the option to be on or before the relevant date of the transfer, then that option to tax has legal effect and so is ‘in place’.

The second part of the answer is found in the guidance in the link above, which confirms that if the option to tax notification is sent to HMRC’s National Option to Tax Unit using the email address given in that guidance, an automated response will be received showing the date the notifications was received. However, notifications sent in any other way will get no acknowledgement or receipt.

This automated email response plus a copy of the option to tax notification sent to HMRC should therefore be sufficient to prove that the option to tax has been notified etc.

Of course, solicitors may not be aware of the changes to HMRC’s practices, so may still ask for the acknowledgement letter and so may need educating on it during the TOGC process but it does seem more vitally important now to send the notification by email as above.