UK: VAT And Property - New Rules For The Option To Tax

Last Updated: 6 June 2008
Article by Michael Boutell and Steven Sieff

The legislation regulating the option to tax land and buildings (contained in Schedule 10 Value Added Tax Act 1994) VATA 94 has been re-written in an attempt to make it clearer. The new Schedule 10 came into effect on 1 June 2008. Although the principal purpose behind the new legislation is to make the complex legislation easier to understand, the new Schedule 10 and accompanying tertiary legislation (contained in a revised Notice 742A) introduces substantive changes to the option to tax regime.

HM Revenue and Customs ("HMRC") has also published a series of new forms and certificates dealing with the option to tax. These forms and certificates together with certain parts of Notice 742A are tertiary legislation and accordingly have the force of law. The use of these forms and certificates will be compulsory. HMRC has said that it will (until further notice) continue to accept notification of an option to tax in a different format (provided that it contains all the information that is required by the new Form 1614A) but we would recommend that taxpayers begin using the new forms straight away.

Over the course of the next few weeks additional Law-Nows will be sent out dealing with each aspect of the changes in more detail.

To read a summary of the principal changes brought about by the new Schedule 10 and tertiary legislation see below:

To view the article in full, please see below:




Full Article

The legislation regulating the option to tax land and buildings (contained in Schedule 10 Value Added Tax Act 1994) has been re-written in an attempt to make it clearer.  The new Schedule 10 came into effect on 1 June 2008.  Although the principal purpose behind the new legislation is to make the complex legislation easier to understand, the new Schedule 10 and accompanying tertiary legislation (contained in a revised Notice 742A) introduces substantive changes to the option to tax regime.

HM Revenue and Customs ("HMRC") has also published a series of new forms and certificates dealing with the option to tax.  These forms and certificates together with certain parts of Notice 742A are tertiary legislation and accordingly have the force of law.  The use of these forms and certificates will be compulsory.  HMRC has said that it will (until further notice) continue to accept notification of an option to tax in a different format (provided that it contains all the information that is required by the new Form 1614A) but we would recommend that taxpayers begin using the new forms straight away.

Option To Tax Replaces Election To Waive Exemption

The term "option to tax" (which has been the preferred colloquial term) will now, as a matter of law, replace the term "election to waive exemption".  Notification of the option to tax must be made on Form 1614A although until further notice HMRC will accept written notification in an alternative form provided that it contains all the details required by Form 1614A. 

Permission To Opt To Tax

Where there have previously been exempt lettings it has been necessary to obtain HMRC's prior permission before opting to tax (either specifically or through the general permissions given if specified conditions are satisfied).  This means that a taxpayer that has owned a property since the introduction of the current VAT regime in 1989 would have to check back 19 years to see if any exempt lettings were made.  Going forward, only exempt lettings in the previous 10 years will be relevant.   Where HMRC consent is required it will need to be sought on new Form 1614H. 

Residential Use

Where a taxpayer has opted to tax a commercial building and sells to a buyer who intends to convert the building to residential use the taxpayer's option to tax is disapplied (which may have input tax consequences).  Under the new rules the option to tax continues to be disapplied but only if the buyer/tenant that intends to convert a commercial building to residential use provides an appropriate certificate of intention (new Form 1614D) to the seller/landlord before, in effect, exchange of contracts (unless the seller agrees otherwise). Provision is now made for certificates to be supplied by intermediaries. 

The option to tax is disapplied on a sale/ lease to a housing association (in England and Wales, a Registered Social Landlord) where an appropriate certificate is given.  The new certificate is contained in Form 1614G and must be given before, in effect, exchange of contracts (unless the seller/landlord agrees otherwise) if the option to tax is to be disapplied. 

Revoking An Option To Tax

Originally, the option to tax could not be revoked until a period of 20 years elapsed (although the legislation did not address how this could be done nor impose any restrictions).   In 1995 the position was relaxed slightly and now is to be relaxed further.  It has been possible to revoke an option to tax in the first three months subject to certain conditions.  Going forward, there will be fewer conditions and the three-month period is extended to six months.  A revocation in these circumstances must be made on Form 1614C.  

Subject to certain conditions, an option to tax will automatically lapse once the taxpayer has not held an interest in the property for six years.

The legislation also deals with the mechanics of revoking an option to tax after 20 years (and introduces some anti-avoidance measures), which will be available from 1 August 2009 (the 20 year anniversary of the introduction of the option to tax and therefore the first time that an option to tax can be revoked under the 20 year rule). 

Demolition And Construction

HMRC policy has been that if a taxpayer opts to tax a building but not the land on which it stands the option to tax falls away when the building is demolished.  This 'concessionary' treatment is withdrawn so that it will no longer be possible to opt to tax land and buildings separately. An option to tax a building would therefore automatically also include the land.  Similarly, if a building were built on opted land the building would be automatically subject to the option to tax.  However, there will be a facility to exclude a new building from the option to tax (using new Form 1614F).  

Global Options To Tax And Real Estate Elections

Some taxpayers have in the past made so-called "global options to tax".  This means that a single election covers more than one building (indeed, although not very common, elections covering all buildings held and buildings to be acquired have been made in the past).  A global option is a single option, which therefore makes revocation problematic.  Going forward, the "real estate election" ("REE") is to be introduced for taxpayers wishing to opt to tax every property it acquires.  Under the new regime each property will be treated as separately opted so that each property covered by the REE can be individually revoked (if the conditions for revocation are satisfied).  Although a REE can offer administrative savings, taxpayers should seek advice on the implications of using a REE before they take advantage of this facility as there may be unanticipated problems later. There are detailed rules for dealing with existing global options to tax.  

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 04/06/2008.

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