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HMRC internal manual

VAT Land and Property

HM Revenue & Customs
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Option to tax anti-avoidance - funding and financing: intention at the time the finance is provided

A person is only treated as being responsible for financing the owner’s development of the land, if that person knows, at the time they provide the finance or enter into any agreement to provide it, that either they, the owner or a connected party will occupy the building wholly or substantially wholly for a non-taxable purpose. The intention test is applied at the time the agreement to provide the finance is entered into or if there is no agreement, at the time the finance is actually provided.

Instalments paid under the terms of an agreement to provide finance do not represent the provision of new finance, so there is no need to reapply the test each time a payment is made. However, if the original agreement is extended or amended to provide additional finance the intention test is applied at the date of the new agreement.

If the person providing the finance does not or cannot have that knowledge or expectation, they do not qualify as the financier of the development.

The following examples may help you to decide:

  1. A bank which has entered into a contract with a developer for the construction of a new HQ building and has also entered into an agreement to loan that person some or all of the money to meet its cost, will have financed the owners development. This is because the bank knows at the time they make the loan that they will be occupying the building and they will be occupying it for non-taxable purposes.
  2. A bank enters into a loan agreement with a property developer to provide the finance for the construction of a new retail shopping precinct; a new speculative development. At a later date the retail arm of the bank decides that they will take a lease of one of the units. Even though the bank itself or a person connected to them will be in occupation of part of the building for non-taxable purposes, the bank does not qualify as the financier because it did not expect at the time of arranging the finance that it, or a connected person, would occupy the part of the development for non-taxable purposes. Therefore there was no link between the funding and the grant of the lease.
  3. This would not be the case, however, if it is a condition of the loan that the bank is granted a lease in or has the option to take one of the units, as then the bank would normally fulfil the intention/expectation test.
  4. There would also not be funding in a situation where a bank provides revolving or continuous credit to a property developer who subsequently grants a lease in a property to the bank, provided that the bank had no demonstrable intention to take the lease at the time the revolving credit was entered into originally or was subsequently renegotiated.