UK VAT reform: option to tax and formal rulings

By Susan Cattell, Head of Taxation (England and Wales)

2 June 2017

Donald Drysdale discussed two aspects of the OTS review of the VAT regime (the registration threshold and the flat rate scheme) in an earlier article.

A previous article looks at other aspects of VAT which the OTS is considering namely multiple rates and partial exemption. This article considers option to tax and formal rulings.

The OTS will be publishing recommendations in the autumn.

Option to tax

The option to tax process allows a business to decide to charge VAT on any supplies relating to land on which it has exercised an option to tax. The main reason for exercising an option is to enable the business to recover any input tax it incurs relating to the supplies of land.

In order to exercise an option a decision must be taken (and evidenced) and notified to HMRC. There is no database to allow a business to check whether an option to tax has been made for a piece of land; this causes problems in practice. The OTS also notes that there are some supplies of land and buildings where supplies remain exempt even where an option has been exercised.

Input would be welcome on:

  • Difficulties caused by the current system for opting to tax. Could it be simplified?
  • Would a system where, say, all commercial property was considered as opted by default be useful?
  • The creation of a central database. Would the value of such a database outweigh privacy considerations? Would those opting to tax be willing to provide data for inclusion?

Formal rulings

The OTS notes that in many cases businesses feel that the VAT treatment is unclear. They want certainty, particularly in two areas:

  • A binary ruling, for example when introducing a new product, a business wants confirmation of the VAT treatment.
  • The business is undertaking a one-off unusual business event such as selling a business.

Problems highlighted include HMRC being unwilling to provide confirmation of the proposed VAT treatment and referring businesses to published guidance. However, the reason the business or its adviser has contacted HMRC is because the guidance is perceived to be out of date or incomplete. Businesses are concerned that if they make the wrong decision they will be exposed to penalties.

Some jurisdictions offer rulings to businesses – either free of charge or on a pay as you go basis. HMRC does offer a ‘clearance’ service but this is apparently not meeting business needs so the OTS suggests that a rulings system should be considered. It is interested in views on areas of the VAT system that most need rulings and why.

The OTS also asks whether improvements to HMRC guidance, perhaps to include more examples illustrating HMRC’s interpretation of the law, would reduce the need for rulings.

What do you think?

ICAS plans to respond to the OTS review by 30 June 2017, and is keen to hear views on the questions summarised on pages 27 – 30 of the OTS interim report and call for further evidence and on any other ideas for simplifying VAT.  If you’d like ICAS to take your views into account, please email us.


  • Tax

Previous Page