Option to Tax – HMRC to keep up with the times?

This is the sixth in a series of articles looking at the report issued recently by the Office of Tax Simplification (OTS), looking at the option to tax and specifically record keeping and the complexity of anti avoidance provisions.

What everybody agrees is that the current system is simply not fit for purpose!


The VAT liability of supplies of commercial land and buildings is ordinarily exempt from VAT, subject to a number of exceptions e.g. supplies where the land and buildings are less than three years old. However, the option to tax convert an otherwise exempt supply into a taxable supply, thereby allowing VAT recovery on associated costs. Where the recipient is able to recover VAT, this VAT charge does not create an additional cost for them.

OTS report

The main area of concern for taxpayers is trying to determine whether an option was exercised over a specific parcel of land and / or buildings.

The OTS report has identified three main areas which cause taxpayers concern, in relation to options, namely:

  1. The time taken by HMRC in confirming whether there is an option in place;
  2. HMRC’s current system of recording options previously made is incomplete and difficult to maintain; and
  3. Unduly complex anti-avoidance legislation.


Possible solutions considered by the OTS to be progressed in the medium term include:

Enable online notification and confirmation of an option

Taxpayers are required to notify HMRC by post or email when an option is made, a process which is drawn out and cumbersome.  It is not uncommon for practical issues to arise in connection  anticipated property transactions so that options are notified at the last minute but the parties need confirmation that the option is effective. HMRC’s normal 30 working day turnaround target does not help this.

One solution recommended by the OTS would be for taxpayers to enable options to be notified online via a business’s or authorised agent’s portal without the need to print forms. An automated acknowledgement could be provided as evidence of notification. Once processed, this may be filed by HMRC in the taxpayers online HMRC portal.

This has the advantage of creating an audit trail for information in future legal transactions. However, this solution does not address the position for options made in the past, albeit this issue will reduce over time.

Database of options accessible by businesses and advisers

Taxpayers entering into transactions need to know if an option is in place or not. In addition provisions which permit the revocation of an option after 20 years, require evidence of the original option and many taxpayers’ records may not go back that far. One of the main problems is the length of time taken by the HMRC in responding to queries. An answer to this may be for HMRC to:

  1. create a database of options exercised; or
  2. add information which is available on the Land Registry’s existing databases.

This has the advantage of reducing the administrative burden for all those involved. However, HMRC would have to investigate whether this would compromise taxpayer confidentiality.

Simplification of anti-avoidance VAT legislation

The anti-avoidance legislation is exceptionally complex, even for VAT advisers! This is despite the fact that the relevant legislation has already been the subject of a “rewrite” in an attempt to make it more understandable. Various further legal changes have been, and are due to be made to reduce VAT planning, so an opportunity now exists now for HMRC to review this complicated legislation.


This area of VAT on land and buildings is complex and any recommendations which simplify existing legislation and / or processes can only be seen as a move in the right direction. The idea of a database for options to tax for use by businesses and advisers resonates well with me. This is something I would like to see being introduced the sooner, the better.

Follow this link to the OTS Report.