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HMRC internal manual

VAT Land and Property

Option to tax - anti-avoidance test: what changes have been made to the anti-avoidance measures?: extension to the measure from 10 March 1999

Schedule 10 paragraphs 12(7) and 17(1) to (3) (formally paragraph 2(3AAA)

The Problem

Under the original provision an option was only disapplied where the building being granted was a capital item. Some businesses avoided the effect of the measure by making the grant of the building prior to it becoming a capital item.

The Solution

Under the revised measure an option to tax would no longer apply where it was the intention or expectation of either the person making the grant or the person providing finance for the development, that the land would become a capital item. This was the case whether the land was to become a capital item for the grantor or any other person to whom the land was to be sold or transferred. In addition, under what was paragraph 2(3AAA) (now paragraph 17 of Schedule 10) grants made between 19 March 1997 and 9 March 1999 could be re-visited and treated, for the purposes of the provision, as made on 10 March 1999. This applied only, however, where at the time of the actual grant the building had not yet become a capital item, but there was an intention that it would become one at a future date.

Where paragraphs 12(7) and 17(1) to 17(3) of Schedule 10 had effect the option to tax was disapplied for any supplies arising from the grant on or after 10 March 1999. Consequently, supplies from this date were exempt from VAT and any input tax recovered subject to adjustment under the capital goods scheme. However, the option to tax still had effect in relation to supplies made prior to 10 March 1999 and, as a result, initial input VAT entitlement was normally unaffected.