Land and Buildings - Opting to Tax From 1st June 2008

Supplies of land and buildings (e.g. sales and lettings) are usually exempt from VAT which means that no VAT is payable on these transactions, however this also means that the supplier cannot recover any VAT on their expenses. To enable the supplier to recover VAT in these situations, the supplier can opt to tax which will make all supplies of the land or building standard-rated.

Changes to the option to tax regime have been brought about by a new schedule to the Value Added Tax Act 1994, Schedule 10 and some of these are briefly summarised below.

Terminology
Before 1 June 2008 the option to tax was sometimes also referred to as ‘the election to waive exemption’ but from 1 June 2008 it will be known only as an option to tax.

Permission to opt
Unless the conditions are met for automatic permission (in which case HMRC must be notified of the option), the taxpayer must seek the written permission of HMRC where he has made or intends to make exempt supplies in the ten year period finishing before the date on which it would like the option to tax to become effective. However, the effective date of the option will no longer be the date on which permission is granted but instead the date on which permission was applied for.

Cooling off period
There is now an extended six month window from the effective date of the option within which an option to tax can be revoked if prescribed conditions are met.

Real estate election
This has replaced the old system of global elections.

If a real estate election is made, HMRC must be notified of all non-residential properties in which the taxpayer (including any group members) has an interest. The option to tax will then apply automatically to all land and buildings acquired by that taxpayer (and any group members) from the effective date of that option HMRC need only be notified where the taxpayer wishes a particular property to be excluded from the option.

Taxpayers who made global elections under the old regime should consider replacing these with real estate elections but should note that real estate elections are irrevocable except by HMRC.

Previous options to tax and new buildings
Where a building is constructed on land which has an existing option to tax, the taxpayer may notify HMRC that it wishes the new building and surrounding land to be excluded from the option at any time from the commencement of construction up to completion of construction, or first occupation, whichever is earlier. Options will therefore continue to apply even where a building is demolished and a new one is constructed unless HMRC has received the prescribed notification.

Revocation
Options (other than real estate elections) may be revoked after 20 years if prescribed conditions are met and HMRC is notified of this. Where the prescribed conditions are not met, the taxpayer can apply to HMRC for permission.

Associated companies
Previously, a company leaving a VAT group could remain bound by an option made by another member of the group. From 1 June 2008, a company which leaves a VAT group will no longer be bound by an option made by another member of the group unless it retains an interest in the property or has a right to any proceeds from it. In any event, the leaving company must meet various conditions and notify HMRC or seek permission from HMRC where it does not meet the prescribed conditions.

Disapplication of options for buildings to be converted to residential use/to be sold to housing associations
To ensure that the option will not apply to the purchase price, the proposed buyer must obtain a certificate from HMRC which should be provided to the seller at the earliest opportunity and in any event prior to exchange of contracts.

Refusal of permission
If HMRC refuses permission in relation to any matter under the option to tax regime, the taxpayer will be entitled to appeal.