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Option to tax
HMRC have clarified their policy in relation to the exercise of their discretion to accept a belated notification of an option to tax land and buildings. In particular, it explains the distinction between a belated notification and a retrospective or backdated option.
There are two distinct stages in the process of opting to tax. The first is making the decision to opt. The second is notifying HMRC of that decision, in writing, within 30 days of the date that the decision was made.
The option has effect from the day on which the election is made or any later day specified in the election. This means that no option to tax can take effect from a date prior to the date on which the trader decided to make the election. This would be a backdated or retrospective option and HMRC has no discretion under the law to accept or acknowledge that it is valid.
However, HMRC have discretion to accept a notification of an option to tax later than the prescribed time limit of 30 days after the decision to opt was made. The discretion is designed to cover situations where a trader has genuinely made the decision to opt to tax, but has failed to notify it to HMRC in time. Before considering whether to exercise this discretion, HMRC need to be satisfied that the decision was made on the date stated in the written notification.
HMRC will usually accept a belated notification if a trader provides evidence, such as the minutes of a Board or management meeting, or correspondence referring to the decision. In its absence, the following would normally be accepted: a statement from the responsible person, plus evidence that:
- all the relevant facts have been given;
- output tax has been properly charged and accounted for from the date of the supposed election; and
- input tax recovery in respect of the land or building is consistent with the trader having made taxable supplies of it.
Other circumstances may also be considered, but this would depend on the individual circumstances of the case.
Conversely, HMRC may not accept that a decision to opt was taken, even when the above conditions are met, if for example:
- there has been correspondence concerning or investigation into the liability of supplies of the property in question since the supposed date of the option, and no mention of the option to tax was made;
- the trader or his representative has previously put forward an alternative explanation for the charging of output tax, for example, that the supply was not of land and buildings, or was of a sports facility.
Moreover, HMRC reserve the right to refuse to accept the belated notification if to do so would produce an unfair result, or if the exercise of the discretion was sought in connection with a tax avoidance scheme.
Business Brief 13/05 dated 4 July 2005.
Supplies of staff
Following the tribunal decision in University Court of the University of Glasgow (EDN/03/0109), HMRC's position follows.
The tribunal looked at two matters:
- whether income that the university received, in return for making medically-registered staff available to work at certain NHS trusts, was consideration for standard-rated supplies of staff or exempt supplies of medical care; and
- whether the method used by HMRC in apportioning non-directly attributable input tax between business and non-business activities produced a reasonable result.
On the basis of the facts presented to it, the tribunal concluded that the supplies in question were taxable supplies of staff. But its findings on this issue do not establish any new principles of law that would apply in every case where employees of one business are working at the premises of another. Businesses entering into this type of arrangement or wishing to review the VAT treatment of past supplies will still need to take full account of the contractual relationships, in the light of the guidance in Notice 700/34 'Staff'.
VAT incurred by Government departments on supplies of staff cannot generally be recovered under Treasury's direction, issued on 10 January 2003, under VATA 1994, s 41(3). This direction is not being reviewed as a result of the tribunal decision.
On the issue of the university's business/non-business apportionment method, the tribunal found that it could not support, in principle, the income based method and calculations that led to HMRC's assessment. In doing so, the tribunal highlighted some of the weaknesses of the approach adopted by HMRC while appearing to favour the input tax based approach, as proposed by the university. HMRC are to appeal the decision, principally on the grounds that the tribunal focused on the method itself rather than the result it achieved.
Business Brief 13/05 dated 4 July 2005.
