Disapplication of the option to tax - anti-avoidance provisions

By Tolley
VAT_tax_img3

The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Disapplication of the option to tax - anti-avoidance provisions
  • Summary of the main types of transactions affected by the anti-avoidance provisions
  • How can a business determine whether the disapplication will apply?
  • Relevant legislation
  • What is a grant and a grantor?
  • What is an eligible purpose?
  • What are connected persons?
  • What does financing the development mean?
  • What does occupying mean?
  • HMRC's view on the application of the anti-avoidance rules

The majority of businesses that make exempt supplies (ie insurance, healthcare, education, finance, etc) are not entitled to recover all of the VAT incurred on costs associated with their VAT exempt business activities. For these types of businesses, VAT incurred on costs associated with land and property transactions represents a significant irrecoverable cost.

VATA 1994, Sch 10, paras 12-17; Value Added tax (buildings and Land) Order (SI 2008/1146) (subscription sensitive); VATLP23000; VAT Notice 742A 

As a result, a number of property VAT planning arrangements were implemented by VAT exempt organisations to reduce the irrecoverable VAT incurred. HMRC became aware of the significant VAT 'loss' incurred due to the implementation of these types of property 'VAT avoidance' arrangements.

As a result, HMRC introduced anti-avoidance provisions with effect from 10 March 1999 which enabled HMRC to automatically disapply the option to tax in certain situations. There have been a number of revisions to the law since it was introduced and this note provides an overview of the latest provisions.

Summary of the main types of transactions affected by the anti-avoidance provisions

If a business grants an interest in land and buildings, and the business that will occupy the land and buildings makes wholly or mainly taxable supplies, and can recover all or most of the VAT incurred on costs, the transaction will not be affected by the anti-avoidance measures described below.

The anti-avoidance measures will affect the following types of transactions (this list is not exhaustive):

  • a partly exempt business granting a lease in a property that the partly exempt business intends to occupy at a later date
  • a partly exempt business entering into the sale and leaseback of a property that the partly exempt business will most likely occupy
  • a

More on Option to tax: