Where a commercial property is sold by a receiver or insolvency practitioner (IP), VAT must be charged on the sale if the owner had exercised and properly notified an option to tax (OTT) in respect of the property. The IP acting on behalf of the seller needs to establish whether an OTT has been made and notified so that VAT is charged , if needed. This can be difficult if company records are in disarray, directors of the insolvent company are non-cooperative and/or the IP or receiver has limited knowledge of the property and company.
A buyer will only pay VAT if it has evidence of the OTT and its notification and there may need to be provisions in a sale contract that allow for VAT to be re-couped if it is uncertain whether a property has been opted to tax.
Before 1 February 2023, HMRC routinely issued letters acknowledging that an OTT had been notified to them. In practice, this letter is usually accepted by both parties as adequate evidence of an OTT having been made and notified.
Also, before 1 February, HMRC would generally respond to enquiries as to whether they had a record of an OTT if the taxpayer had insufficient records.
From 1 February 2023, HMRC will not issue a letter acknowledging receipt of an OTT. Instead, the taxpayer will receive an automated email response simply acknowledging receipt of a notification that has been made by email. In addition, HMRC will no longer respond to enquiries about whether they have an OTT record, where the OTT is likely to have been made in the last 6 years.
This means that evidencing an OTT going forward is likely to become more difficult because taxpayers are less likely to retain an automated email response than the old- style acknowledgment letter, and it will generally not be possible to ask HMRC if they hold a record of an OTT if the taxpayer does not have the evidence.
However, HMRC have specifically said they will continue to deal with enquiries from receivers and insolvency practitioners about OTT records (even within the previous 6 years) provided they supply the relevant information. Alongside providing evidence of appointment, HMRC will require the:
- name of the business or person who opted to tax the property
- VAT registration number (if applicable)
- full address of the land or property in question, including postcode
- effective date of the option to tax, if known
- date VAT was first charged on the opted land or property
- date the property was either acquired or a loan was taken out (or both) by the opter on the relevant property
This means that in insolvency situations, it should still be possible to confirm the VAT position of properties. However, it is unclear how HMRC will respond to requests from receivers and IPs if they are unable to provide all of the information required. In some cases, an IP or receiver may not know whether the property is opted to tax in the first place, therefore confirming the date when VAT was first charged on the property will be problematic.
The information required by HMRC is set out in this HMRC Brief and although expressed in mandatory terms i.e “you must provide” one would hope that HMRC will continue to provide the same support to receivers and IPs as it has done in the past to enable IPs and receivers to deal with property sales.