HMRC’s own interactive VAT form was used to show how an option to tax election could not have been made on a date other than when the taxpayer claimed.
A successful option to tax election permits a business to charge 20% VAT on the future rental income from letting a building, and on the sale of the building. The reward for the owner is that they can claim input tax on related expenses. Rental income is usually exempt from VAT without an option to tax election, meaning there is an input tax block under the rules of partial exemption.
There are two separate stages to making an option to tax election: decision and notification.
Somebody decides that an option to tax election is in the best interests of the business, ie the disadvantages of charging 20% VAT on property income are outweighed by the input tax gains. This decision is usually taken by the business owner or the directors, often supported by professional advice, and it will happen on a specific date.
HMRC must be told about the decision to opt to tax within 30 days of it being made, usually by completion of form VAT1614A.
HMRC will allow a belated notification as long as it is satisfied that the taxpayer had taken the decision to opt to tax on the date requested. This evidence could come from a variety of sources, such as proof of VAT being charged on supplies connected with the building since the date in question (rental invoices), and input tax being claimed on related costs. (VAT Notice 742A, para 4.2.1).
Rowhildon Ltd (TC06669) bought a building on 30 June 2016 and completed form VAT1614A on 1 July 2016. But that form was never received by HMRC despite the taxpayer being adamant that it had been posted on 4 July 2016.
The problem only came to light in October 2016 on a VAT compliance visit. HMRC was happy to backdate the election to 16 September 2016 when the building was sold (because VAT was charged on the sale), but not to the earlier date of 1 July 2016 which was the election date claimed by the taxpayer.
The taxpayer kept a copy of the form VAT1614A which it submitted. The company’s representative at the FTT hearing demonstrated the process involved in completing the VAT 1614A online.
The judge was satisfied that it would have been impossible to complete the VAT1614A form after 1 July, because HMRC’s website software prevents the taxpayer from including a date which is earlier than when the form is being completed. In reality, the latest the taxpayer could have completed the form was 1 July, therefore providing proof that the decision had been taken by this date.
HMRC refused to backdate the option to tax because the taxpayer had been unable to provide proof of posting that the form was sent to HMRC on 4 July 2016. Also, there had been no mention of an election to opt to tax in any company board meeting minutes.
The tribunal considered that the date on the VAT1614A was adequate proof that a positive decision had been taken by the directors to opt to tax the building on 1 July. It also recognised that it would have been impossible to make an option to tax election after this date because the HMRC software would not allow the insertion of an earlier date. The appeal was allowed.
Why did HMRC completely ignore the fact that the taxpayer must have completed the VAT1614A form on 1 July 2016 at the latest because of its own software parameters? This in itself is proof of the decision process.
In the modern world, how many smaller companies have board meetings where they discuss the finer details of VAT? Also, how many business owners have the time to queue up in a post office to get a proof of posting a document to HMRC?
I hope that the outcome of this case is that HMRC will be more flexible in the evidence they accept from business owners to confirm that a decision to opt was taken on a specific date, even though the paperwork (the notification) was not received within the 30-day deadline. This is an important victory for the taxpayer.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.