Farming and rural businesses are being told to be extra diligent when 'opting to tax' and ensure detailed records are kept on file.
HMRC’s decision to stop issuing option to tax acknowledgement letters from 1 February 2023 will impact rural land and property owners, Saffery Champness says.
A supply of land or commercial/agricultural property is largely exempt from VAT, unless the party making the supply has ‘opted to tax’.
An option to tax election is basically where the supplier makes a conscious decision to charge VAT rather than keep the supply as VAT exempt.
Such decisions are usually made to ensure the supplier can reclaim the VAT incurred on associated costs. An option to tax needs to be notified to HMRC in order to be effective.
Both buyers and tenants will want to know whether they are going to incur VAT or not when acquiring or renting land or commercial/agricultural property.
Saffery Champness says usual practice is to request from the seller/landlord evidence of an option to tax election.
Generally acceptable evidence has been HMRC’s acknowledgement letter issued following the submission of an option to tax election to HMRC.
However, in light of HMRC’s decision to stop sending out such letters, Saffery Champness is advising rural businesses to be extra diligent when opting to tax and to ensure detailed records are kept on file.
Nick Hart, VAT director at Saffery Champness, says: “The retention of option to tax records is an important part of the mandatory need to retain business records and to demonstrate to other interested parties that a valid option to tax has been made.
"Now that an HMRC acknowledgement letter will not be received those records will need to be particularly comprehensive to satisfy counterparties to property transactions, which would include farms let under FBT arrangements for example, that VAT is being correctly charged to them.”
Mr Harts says there is some best practice which needs to be adopted now when making a new option to tax election, to safeguard against complications in the future.
The automated email which HMRC will send out when an election is submitted to the option to tax unit, has become just one important element that should be kept on file.
However, no response from HMRC should be expected if an election is notified by post, Mr Hart explains.
“Uncertainties regarding option to tax elections can delay or potentially prevent transactions from completing," he says.
"Rural land and property owners need to ensure their house is in order with respect to option to tax records, as HMRC will no longer check on their side to confirm an election has been made, where it is believed to be under six years old.”
