haysmacintyre: Is your structure fit for purpose? How are HMRC’s delays and removal of services affecting property deals, and how can these be navigated?

Background

There have been two key changes that HMRC has introduced in the last six months. Firstly, HMRC has stopped sending out confirmations for OTT notifications and ceased providing confirmation of opted properties, except where the option was over six years old. Secondly, in recent weeks, they have also closed the VAT registration helpline. These changes can have a major impact on property transactions as many property deals depend on VAT registration or an OTT being in place, or confirmation that a property has been opted historically.

Option to Tax changes

HMRC confirmed that with effect from 1 February 2023, they will no longer issue acknowledgement letters confirming that an OTT notification has been submitted.

Historically, when an OTT form (VAT 1614A) was submitted to HMRC, HMRC would issue an acknowledgement letter confirming receipt of the OTT. The acknowledgement letter is usually one of the main documents that is requested by any buyer in any property transaction, or often by tenants when entering any lease in respect of an opted property. This is because it had the address of the relevant property and was addressed to the person who had made the option. In the last year or so, there has been inconsistency with HMRC sometimes sending acknowledgements and sometimes not. HMRC has now decided to simply not issue acknowledgement letters in all cases.

HMRC has also confirmed that they will stop processing requests confirming the existence of an OTT, unless:

• The effective date of the option is likely to be over six years ago; or
• The request has come from a Land and Property Act Receiver or an Insolvency Practitioner who has been appointed to administer the property in question.

We are now in a position where an OTT may have been made in the last six years but there is no record of it. This could lead to delays in property deals, especially if all parties in a transaction are not aware of this new change.

HMRC would say their stance is reasonable since records are required to be kept for six years. However, this overlooks the possibility of a lack of staff continuity, businesses relocating and files being lost during the move and, that for an OTT to be valid, it has to be submitted and notification made to HMRC – of course, only HMRC can confirm whether applications sent to them have been received.

If HMRC wanted to reduce its workload in this area, and continue to provide a high-quality service, it has missed a golden opportunity to do so. In a recent consultation, the possibility of allowing access to HMRC’s records of OTT applications was mooted, which would have allowed taxpayers to check whether an option had been made, and if so, by whom. It would have functioned in the same way as being able to verify whether a VAT registration number is valid. Allowing taxpayers to check OTT applications could have been gradual, with only new options going on the register initially (and possibly at the same time they ceased acknowledging options), with older records being added in due course.

VAT registration delays

HMRC announced that they would be closing the VAT registration helpline, giving users only five days’ notice – it closed on 22 May 2023. Taxpayers have been advised to email the VAT registration unit for an update but only after 40 working days have elapsed from the date of application. Unfortunately, delays with applications have been a familiar theme over the last 18 months, with HMRC frustrating businesses and agents alike.

The delays became worse when HMRC introduced a new VAT registration process last year, which seemingly had not been trialled before its introduction. We were advised at one point that a mailbox address, which was part of the new process, was not going to be monitored.

This is of course extremely frustrating when many property transactions hinge on the buyer registering for VAT in order for the transfer of a going concern (TOGC) treatment to apply or in order to recover VAT on the purchase price, for example.

What can be done to navigate these issues when working within the property sector?

It is important that all property businesses, and solicitors dealing in property, are aware of these recent changes. If not, it could lead to further delays in finalising transactions. Therefore, businesses and their agents must keep copies of all forms, emails, and automated emails from HMRC as these are now the only evidence available to businesses.

Under the new approach, when a new OTT is notified to HMRC via the OTT unit email address (optiontotaxnationalunit@hmrc.gov.uk), an automated email response will be sent. This will be the only correspondence received from HMRC, unless they require further information regarding the notification. Businesses should therefore retain a copy of the email submitting the notification to HMRC, perhaps even cc’ing colleagues when sending, along with this automated email receipt. It is also important to include the property address, postcode and effective date of the OTT notification in the subject line of the email, to demonstrate that an email was sent to the OTT unit and that it relates to a specific property.

The same procedure should be followed when following up on VAT registration applications. Whilst HMRC request that no contact is made during the first 40 working days after an application, there is no harm in contacting HMRC via email (vrs.newregistrations@hmrc.gov.uk) and asking for an update. We have seen replies from HMRC regarding updates on applications, even just to confirm that the application is being processed, thus giving businesses and agents some peace of mind regarding their application.

In addition, when VAT registration is required, it is important to begin this process at the earliest opportunity to give yourself the best chance of having a VAT registration number prior to the transaction taking place.

Conclusion

As the above highlights, the key is communication between the buyer, seller and their solicitors, making them aware that HMRC has changed the process they use to confirm OTT notifications, and that there could be delays in getting the business registered for VAT. The importance of keeping all correspondence from HMRC including automated emails, your sent emails and forms has never been more vital, as these would now seem to be the only evidence that businesses have of submitting their application to HMRC. Therefore, having these readily available, and all parties informed of the situation, should help navigate the changes that HMRC has made.