Option to Tax: HMRC changes will increase risk on property transactions

These important changes will affect all those seeking to buy and sell commercial property says Fiona Phillips, partner with Andrew Jackson Solicitors, who considers the implications

The VAT default position for the majority of commercial property sales is to treat them as exempt supplies, meaning the seller is unable to reclaim input VAT.

It is possible to elect to treat such exempt supplies as standard rated – by making an “option to tax” (OTT) – and hence allowing input VAT recovery.

To make a valid OTT requires two steps: first, the business decides that an option to tax on a building should be made and would document this; and second, a notification would be sent to HMRC.

Previously, HMRC would send an agreement to an OTT to the business but from September 2022 this was replaced by supplying a receipt letter only.

Now, HMRC has announced that from 1 February 2023 it will stop issuing Option to Tax Notification receipt letters, with the only possible acknowledgement being an automated email response. A notification sent by any other means will not receive an acknowledgement or receipt unless HMRC requires further information about the option.

This creates issues for those who aren’t communicating with HMRC digitally and also for a business needing to prove that it had opted the building – for example, on a future sale.

It is the responsibility of the business to ensure that the OTT is valid and you should keep as much contemporaneous evidence as you can of the opting process, signed by an authorised person.

If you would like to discuss how the changes to HMRC’s Option to Tax process will impact you and your property plans, please get in touch with our friendly team or contact Fiona Phillips at or call 01904 275 250