Informing HMRC of a belated notification of the option to tax

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Andrew Needham explains how if a business forgets to tell HMRC that it has opted to tax a property it can submit a ‘belated notification’.

In order to recover the VAT on the costs of purchasing or refurbishing a commercial property, a property rental business will have to opt to tax the property and complete a form VAT 1614A and send it HMRC within 30 days of taking the decision to opt to tax. It would then charge VAT on any subsequent rental or sale of the property.  

Forgetting to tell HMRC

It is not uncommon for a business to fail to notify HMRC of its decision within the 30-day limit.  A common reason for failure to notify the option to tax is where a business purchases a property on which the vendor has opted to tax and assumes that the option carries over to them; or it may be because they simply didn’t know the procedure. It is a common misconception that if an owner opts to tax a commercial property and sells it that the option to tax carries over to the new owner – it doesn’t; each new owner has to decide to opt to tax and then has to notify HMRC separately.  

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Belated notifications

The VAT legislation allows HMRC to accept a ‘belated notification’ of the option to tax after the 30 day period (VATA 1994, Sch 10, para 10(2)) if certain conditions are satisfied. HMRC will normally accept a belated notification providing:

  • direct documentary evidence is supplied that the decision was made at the relevant time, for example copies of correspondence with third parties referring to the option to tax; or
  • evidence is supplied that output tax has been charged and accounted for and input tax claimed and a responsible person, such as a director, provides a written declaration that the decision to opt was made at the relevant time and that all relevant facts have been provided to HMRC.

HMRC might accept a belated notification in other circumstances, but this will depend on the facts of the case. If you need to make a belated notification you will need to write to HMRC’s National Option to Tax department and enclose copies of recent rental invoices showing that VAT has been charged, as well as an ‘audit trail’ showing that the VAT has been accounted for on the VAT return.

Can HMRC be awkward?

Although the legislation and HMRC guidance is quite reasonable the actual attitude of the officers implementing it can be more awkward and they will often dispute the option to tax date, which could result in a reduction in the input tax that can be claimed. In order to avoid problems, make sure you have all the relevant documentation with your application for a belated notification and if you have problems with HMRC over the option to tax date request a review.

Problems often occur where a property business acquires a commercial property and refurbishes it and decides to leave registering and opting to tax until near the end of the project. It then discovers that there may be a restriction in the input tax that can be claimed as VAT on the building work occurred more than six months prior to registering cannot be reclaimed. The business then tries to backdate the application for registration and the option to tax to the time the project started and HMRC can argue over this date. The business still has the law on its side but it can result in a protracted argument, so it is always better to register and opt to tax at the start of a project. 

Practical tip

A property rental business that buys or owns a commercial property and wants to reclaim any associated VAT will need to opt to tax it. HMRC should be informed of this decision within 30 days but if this is not done on time it can still make a belated notification.