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HMRC internal manual

VAT Land and Property

HM Revenue & Customs
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Option to tax - anti-avoidance test: how does the anti-avoidance test work in practice?


The test is applied to each individual grant of the land (including grants treated as made by someone other than the grantor - see VATLP23420). As a result of applying the test an option to tax may be disapplied in respect of some grants but not others. In relation to each grant it is necessary to consider the person(s) that will be in occupation and the use they will make of the property.

The following is a summary of the anti-avoidance test. For full details of the test you should refer to Section 13 of Notice 742A Opting to tax land and buildings.

When can an option to tax be disapplied?

An option to tax may be disapplied in either of the following circumstances:

Where all of the following apply Where the following applies
1) The building is (or is intended or expected to become) a capital goods scheme item for the grantor or a person to whom the building is to be transferred.  

2) The building will be occupied by one of the following:

  • the grantor,
  • a person who has provided finance for the purchase, construction or development of the building (a ‘development financier’) or
  • a person connected to either of the persons in (i) and (ii) above.

3) The occupation by the person in ‘2’ above is not for the purpose of making taxable supplies (‘wholly or substantially wholly for eligible purposes’).
But the following are not treated as being in occupation:

  • a person whose only occupation is by way of ATMs.
  • a development financier (or person connected to a development financier) who will be in occupation of no more than 10% of any building included in the grant (‘the 10 per cent occupation rule’).
  • a grantor (or person connected to a grantor) who will occupy no more than 2% of any building included in the grant (‘the 2% occupation rule’).  A person (‘P’) makes rental supplies in relation to a lease granted by someone else. In such cases the legislation treats ‘P’ as the person that made the grant (the grant is treated as made at the time ‘P’ makes its first supply under the lease). The tests in A above are then applied as if ‘P’ made the grant.

The following examples illustrate the possible effects of the provision. In all cases it is assumed that the property is a capital goods scheme item for the grantor:

Example 1: Grants by landlord to a number of different occupants

The landlord (L) is the leasehold owner of land on which he has constructed a new office building. He grants leases to three tenants, T1, T2 and T3. L and T1 are connected (see VATLP23700). T1 is exempt and wishes to use the building itself or make it available to a subsidiary, which is also exempt. L has opted to tax the building.


The supplies, which result from L’s grant to T1, are affected by the measure and the option to tax is disapplied in relation to the rents collected from T1 (this assumes that neither the 10 per cent or 2 per cent occupation rules apply).

L’s leases to T2 and T3 are unaffected by the measure as they are not connected to L and use the building for making taxable supplies. L’s supplies to T2 and T3 are standard rated.

Should T2 or T3 sub let the property, they would themselves be making a grant and must apply the test if they have made an option to tax.

See the flowchart for Example 1 (Word 32KB)

Example 2: Occupation granted via an intermediary

L and T1 are connected. In this example an intermediary is interposed between the landlord and the tenants and L makes a single grant to company B, who in turn grants leases to T1, T2 and T3. The rest of the details are the same as above.


As T1 (an exempt business) is connected to L and is not in occupation of their part of the building for ‘wholly or substantially wholly eligible purposes’, L’s option to tax is disapplied in respect of the grant to B. This is the case even though T1’s occupation has only come about as a result of B granting a sub-lease. Under the provision, the option disapplies where it is the intention of the grantor or ‘development financier’, that the land will become exempt land ‘whether immediately or eventually and whether or not as a result of the grant’. In this example, supplies by L are affected by the measure even though the majority of the building will be used by T2 and T3 for making taxable supplies.

Schedule 10, paragraph 16(10) confirms that a person is considered to be in occupation of land regardless of whether they occupy all the land or only part of it. It is the use that T1 makes of their part of the land that results in the disapplication of L’s option to tax. However, this may not be the case where either the 2 per cent or 10 per cent occupation rules apply (see above).

If B has opted they must in turn apply the test to the grants made to T1, T2 and T3.

See the flowchart for Example 2 (Word 33KB)

Example 3: Supplies made under a lease granted by a different person

In this example B and T1 are connected. T1 is occupying the building for exempt purposes and B is its special purpose vehicle. Developer D constructs the building and grants a lease to T1. D is not connected to T1 and has not been funded. As a result D’s option to tax is not disapplied and he is able to recover the input tax on his costs in full. D then disposes of the property to B via a freehold sale with the benefit of the lease granted to T1.


B’s option to tax is disapplied because he is treated as making the grant to T1 at the time of his first supply under D’s lease. For the purposes of the TOGC provisions the freehold disposal by D is a taxable supply (it cannot be a TOGC as B is unable to notify D that his option to tax is not disapplied). As B’s supply is exempt he is unable to recover the input tax he has incurred on the acquisition of the freehold. In this way the input tax cost on the acquisition of the building that should have stuck with T1, has been borne by the SPV.

See the flowchart for Example 3 (Word 35KB)

Example 4: A grant to a “development financier” intending to occupy no more than 10 per cent of a building

A developer “D” has constructed a fully enclosed shopping mall comprising of 50 units, which for the purposes of the option to tax is treated as a single building. D holds the entire freehold interest in the mall and grants leases to 50 tenants (T1 to T4 of those 50 are shown in the diagram). One unit is occupied by T3, a bank which has financed D’s construction work. T3 occupies only 5 per cent of the total building and makes mainly exempt supplies.


Where the grant was made prior to 1 April 2010 D’s option in respect of supplies to T3 is disapplied. However, D’s option is not be disapplied where the grant is made on or after 1 April 2010. This is because T3 occupies less than 10 per cent of the building and under the ‘10 per cent occupation rule’ is treated as not in occupation for the purposes of the anti avoidance measure.

See the flowchart for Example 4 (Word 35KB)