Disapplication of the option to tax ― anti-avoidance provisions

Produced by Tolley

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...

Disapplication of theoption to tax ― anti-avoidance provisions

The majority of businesses that make exempt supplies (ie insurance, healthcare, education, finance, etc) are not entitled to recover all of theVAT 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 theirrecoverable VAT incurred. HMRC became aware of thesignificant VAT 'loss' incurred due to theimplementation 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 theoption to tax in certain situations. There have been a number of revisions to thelaw since it was introduced and this note provides an overview of thelatest provisions.

Summary of themain types of transactions affected by theanti-avoidance provisions

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

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

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

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

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

  4. a business purchasing a property, with thefinance provided by a bank that intends to occupy part of thebuilding

If theoption to tax is disapplied under the

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