HMRC Option To Tax And Property VAT Enquiry Explained

Supplies of most commercial land and buildings are exempt from VAT by default, but an owner can opt to tax a specific property, making future supplies of that property standard-rated and allowing input tax on related costs to be recovered. The option must be validly notified to HMRC, in most cases within 30 days of the decision being made, and in some circumstances requires HMRC's prior permission before it can take effect.

HMRC checks option to tax positions because a large amount of VAT can turn on a single missing notification. A business may have treated a property as opted based on an internal decision that was never actually sent to HMRC, or sent late, which can invalidate VAT charged or recovered on that basis.

A valid option requires a clear decision to opt, followed by notification to HMRC using the prescribed form within the required time limit, and in certain cases, such as where the property has been used for exempt purposes or supplies have already been made to connected parties, HMRC's prior written permission is needed before the option can take effect.

Common problems HMRC finds include an option decided internally but never notified, notification sent to the wrong address or without the correct reference, or an option purportedly made for a property where permission conditions applied but were never satisfied. If HMRC cannot locate a notification and you cannot produce evidence it was sent and received, the option may be treated as never having taken effect.

If VAT was charged on a sale based on an option that was in fact invalid, the seller may have charged VAT it was not entitled to charge, creating both an over-collection issue with the buyer and a potential dispute over correcting invoices. Conversely, if VAT should have been charged but was not because the option was overlooked, the seller may face an assessment for VAT that cannot easily be recovered from the buyer after completion.

Because commercial property transactions often involve large sums, the practical consequences of an option to tax error can be significant, and HMRC will look closely at the paper trail rather than accepting a general assertion that an option was made.

A transfer of a going concern (TOGC) is treated as outside the scope of VAT rather than a taxable supply, provided specific conditions are met, including that the assets are sold as part of a business capable of separate operation, the buyer intends to carry on the same kind of business, and where the property is opted, the buyer notifies their own option to tax and it takes effect no later than the transfer.

For a property letting business, HMRC frequently disputes TOGC treatment where the buyer did not clearly continue the letting business, where existing tenancies did not transfer properly, or where the buyer's own option to tax notification was late or defective. Getting TOGC wrong in either direction, treating a taxable sale as TOGC or vice versa, creates a VAT liability that is often difficult to correct after completion.

HMRC typically wants the option to tax notification and any acknowledgement, evidence of when the decision to opt was made, the sale or lease contract, completion statements showing how VAT was applied, and, for a TOGC, evidence of the buyer's continuing use of the property and their own option notification.

Given the sums involved, it is worth retaining this evidence indefinitely for opted commercial property rather than only for the standard VAT record-keeping period, since HMRC or a future buyer's solicitor may ask for it years after the original transaction.

Where HMRC concludes that VAT was undercharged because an option was invalid, or that TOGC treatment did not apply, it can assess the VAT that should have been charged, together with interest, and consider a penalty depending on behaviour. Because property transactions are often complex and evidence-dependent, a considered response addressing each condition is usually more effective than a general disagreement.

If the dispute cannot be resolved by correspondence, HMRC's decision should set out review and appeal rights, and in some cases it may be appropriate to request an HMRC ruling on future transactions to avoid repeating the same problem.