V4.115B Land subject to an option to tax—exclusions from option (anti-avoidance)
The anti-avoidance provisions are complex, and a detailed explanation is set out below. It may be helpful to bear in mind the purpose behind the legislation, ie to prevent a partly (or fully) exempt business from mitigating a VAT cost by creating 'artificial' taxable supplies which spread irrecoverable VAT over a number of years. Thus, in broad terms, the effect of the provisions is to prevent the option to tax applying where a building which is subject to the Capital Goods Scheme (see V3.470) is to be occupied by the owner, their financier, or a person connected1 with either, for purposes that are not fully taxable. In the words of HMRC2:
If, at the time of the grant of land or buildings:
• The property is, or is expected to become, a capital item for the purposes of the Capital Goods Scheme, either for the grantor, a person to whom the property is transferred or a person treated as the grantor, see paragraph 13.3.3.
• It's the intention or expectation of the grantor or the person treated as the grantor, see paragraph 13.3.3, or a person responsible for financing the grantor's acquisition or development, that the building will be occupied by them or a person connected3 with them.
• The person occupying the property will be doing so other than wholly or substantially wholly for eligible purposes, see paragraph 13.9.
Then the option to tax will not have effect
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