VAT and property: new rules for opting to tax (May 2008)

For many property owners, the ability to exercise an option to tax (OTT) in respect of their interest in land and buildings is extremely valuable: making rental income or disposal proceeds taxable allows the owner to recover all the VAT incurred on construction and other costs.

However, with effect from 1 June 2008, there will be some important changes to the OTT rules, including, but not limited to, the following:

• Coverage of an option to tax: a future OTT can cover an area of land, rather than a specific property, e.g. covering all interests held in Wales or the City of London.
• Demolition: the new rules confirm that an option to tax land will also apply to any buildings subsequently constructed on that land, unless the owner decides to exclude a new building from the option. In addition, an option to tax a building that is subsequently demolished, will still apply to the land on which it stood.
• Real Estate Elections (REE): an REE provides that the OTT applies automatically to any future, relevant acquisitions of land or property. This removes the inconvenience for businesses/individuals of notifying HM Revenue & Customs (HMRC) in writing each time the owner opts to tax a new interest.
• Options requiring permission: unless the automatic permission rules apply (and the circumstances in which they do are limited), permission will now be needed to opt to tax where the owner has granted an exempt interest in the land or property in the previous ten years.
• ‘Cooling off’ period: a ‘cooling off’ period now allows options to be revoked up to six months from the date of the option, providing the land/building has not been supplied, occupied or ‘used’ in that period.
• Revocation of the option: the first options took effect from 1 August 1989 and will therefore be revocable from 1 August 2009. The ability to revoke an option will be particularly useful for exempt bodies that have longstanding lease and leaseback arrangements in place.
• Dwellings: it is still not possible to opt to tax dwellings or residential buildings, such as nursing homes or student accommodation, but there are new rules where the purchaser is planning a change of use. If the purchaser intends to convert a non-residential building into one intended for residential use, he must provide a certificate to the vendor within a very strict timescale, confirming his intention. This will mean the option to tax will not have an effect on that supply, with the result that no VAT will be payable by the purchaser.

The new rules are numerous and concern almost all aspects of the option to tax facility, thereby potentially affecting all businesses with interests in land and property.

We strongly recommend that you seek professional advice from your independent financial adviser in order to ascertain what the imminent changes mean for your business.

© Baker Tilly UK Group LLP, all rights reserved, 03.08

This technical briefing is designed for the information of readers. Whilst every effort has been made to ensure accuracy, information contained in this briefing may not be comprehensive and recipients should not act upon it without seeking professional advice from their usual professional adviser.

Baker Tilly & Co Limited is authorised and regulated by the Financial Services Authority to conduct a range of investment business activities.

Baker Tilly UK Audit LLP, Baker Tilly Tax and Advisory Services LLP, Baker Tilly Corporate Finance LLP and Baker Tilly Restructuring and Recovery LLP are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can  provide these investment services if they are an incidental part of the professional services we have been engaged to provide.

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