Ineffective option

In 2008, the taxpayer company made a late option to tax election in respect of two commercial properties. The same letter requested that the company be registered for VAT.

The situation was complicated by the fact that the company’s bookkeeper had been charging tenants VAT since 2005, without the company being VAT-registered or accounting for output tax.

On the basis that a late election can be accepted provided HMRC are satisfied that it has always been the company’s intention to opt for tax, the VAT officer considered whether the company had effectively exercised an option to tax at the relevant time. He concluded it had not as there was no written evidence to show that it had, and no application to register for VAT.

Furthermore, the taxpayer had made no effort to account for the VAT.  

The taxpayer argued that charging the tenants VAT constituted evidence of its intention to opt to tax.

The First-tier Tribunal did not accept the taxpayer’s argument. The judge, Lady Mitting, said that the appellant was not charging VAT. Instead it was charging a sum, which it described as VAT, but which was used in the general running of the business. There was, furthermore, no proper explanation as to why VAT was charged.

She concluded that it was for the appellant to prove to the tribunal that an effective decision had been made to opt to tax, but it had failed to do this.

The taxpayer’s appeal was dismissed.

Had the taxpayer been VAT registered, accounted for the VAT he had charged to his tenants on quarterly VAT returns, and claimed input tax on the related property expenses, the backdated option to tax elections would not have been a problem because the decision that an election had been intended would have been easy to prove, said Neil Warren, independent VAT consultant.

He added, ‘HMRC’s policy on belated elections was clarified back in 2005 when they issued Business Brief 13/05, and they have applied this policy with a consistent approach in the last five years.

‘The key point is that they will allow a backdated election as long as they are satisfied that the taxpayer had in fact decided to make the election on a particular date: he had just forgotten to notify HMRC. In this case, the taxpayer’s evidence was described in the tribunal report as “vague, contradictory and inconsistent”.’

Issue: 4297 / Categories: Tax cases , VAT