Disapplication of the option to tax ― anti-avoidance provisions

Produced by Tolley
Disapplication of the option to tax ― anti-avoidance provisions

The following Value Added Tax guidance note Produced 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?
  • The 10% occupation rule
  • More...

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.

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):

  1. a partly exempt business granting a lease in a property that the partly exempt business intends to occupy at a later date

  2. a partly exempt business entering into the sale and leaseback of a property that the partly exempt business will most likely occupy

  3. a property developer constructing a new commercial premises, with the finance provided by a bank which intends to occupy all or part of the property

  4. a business purchasing a property, with the finance provided by a bank that intends to occupy part of the building

If the option to tax is disapplied under the anti-avoidance provisions detailed above, the transaction will be

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