The rewritten legislation regarding the VAT treatment of land and property transactions includes new rules on disapplying the option to tax and REEs.

HM Revenue & Customs (HMRC) has finally rewritten Schedule 10 of the VAT Act in relation to the treatment of land and property transactions. The new legislation took effect on 1 June 2008, and although many of the changes were made only to simplify the language used, a number of important changes were made.

Beware the timing

One of the amendments relates to the rules regarding disapplying the option to tax when the purchaser of a commercial building plans to convert the building (or part of it) into residential accommodation.

Since 1 June 2008, the purchaser has to provide the seller with a form VAT 1614D in order for the option to tax to be removed. This certifies that the building (or part of it) is to be used solely for residential purposes. Disapplying the option may have an impact on the seller's VAT position relating to the property.

The point to be aware of is the timing of issuing the certificate. In order to avoid VAT being applied to the transaction, the vendor must receive the certificate "before the price of the grant in respect of the supply has been legally fixed".

HMRC has provided some examples indicating when the certificate should be issued including "by exchange of contracts, by missives or letters, or the signing of heads of agreement". As any of these can be triggered in the early stages of negotiations, this rule is likely to lead to confusion. It could also potentially lead to disputes in relation to whether a certificate was issued in time. Failure to submit the certificate in time will allow the seller to charge VAT on the sale, as the seller can then decide whether to accept it or not.

This will, at best, create a cashflow disadvantage for the purchaser, and, at worst, a substantial amount of irrecoverable VAT and extra SDLT.

Other changes

The revised legislation also introduced a number of other amendments/new rules.

  • Options to tax now apply to land and any existing/future buildings on the land, with a possible opt-out clause for new buildings constructed.

  • The existing 'cooling-off period' for the option to tax has been extended from three to six months, with the additional condition that the land/ buildings not be used or occupied after the option takes effect.

  • An option to tax is automatically revoked if the taxable person who exercised the option has not held an interest in the property for over six years.

  • It is now possible to make a Real Estate Election (REE). This means you will be treated as having opted to tax every property in which you acquire a relevant interest after making the REE.

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