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HMRC internal manual

VAT Land and Property

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HM Revenue & Customs
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Option to tax - anti-avoidance test: what is the test?

The test was first introduced on 19 March 1997 and is now set out in Schedule 10 paragraphs 12 to 17. Under the test an option to tax is disapplied in relation to a grant (eg the grant of a lease) if it is made by the owner of the land, building or part of the building which is or will become a capital item within the capital goods scheme, and at the time of the grant it is the intention of:

  • the owner, or
  • the person who financed the owner’s development

that either of them, or any person connected with them, is to occupy the building otherwise than wholly or substantially wholly for taxable business purposes.

Further details about the test and how it is to be applied are given in section 13 of Notice 742A Opting to tax land and buildings.

The test has been subject to a number of changes since its introduction and care should be taken to ensure the appropriate rules have been applied to each grant subject to the test. The main changes to the test are set out at VATLP23400.

The test was applied to all grants made from 19 March 1997. However, the test was not applied where the grant was ‘a relevant pre-commencement grant’.