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HMRC internal manual

VAT Land and Property

HM Revenue & Customs
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Historical overview of the option to tax

Summary of legislative changes since 1 August 1989

Date Change Legal reference
1 August 1989 Option to tax introduced for otherwise exempt supplies of interests in or rights over land. Transitional arrangements applied until 31 July 1990. Finance Act 1989, Schedule 3. VAT Act 1983, Schedule 6A.
1 January 1992 Where options effective before 1 March 1992 had been preceded by exempt supplies, a business could recover a fair and reasonable proportion of the input tax incurred prior to the option, but subject to permission from the Commissioners. VAT Act 1983, Schedule 6A, paragraph 2(9).
1 January 1992 Where a person wishes to make an option which will have effect after 1 January 1992 and he has made prior exempt supplies, he must seek permission from the Commissioners. Input tax incurred on supplies received prior to the option to be apportioned. VAT Act 1983, Schedule 6A, paragraph 3(10). [became VAT Act 1994, Schedule 10, paragraph 3(9)].
1 January 1992 An option does not have effect unless:  
  • in cases where permission is required, this has been granted; and
  • written notification is given within 30 days of the effective date or longer period if the Commissioners allow.  VAT Act 1983, Schedule 6A, paragraph 3(6). [original paragraph 3(7) repealed at same date].    
      30 November 1994 An option to tax was disapplied where the parties to a transaction were connected and either party was unable to take full recovery of input tax. This was the first attempt at tackling lease and leaseback and other similar VAT avoidance schemes. VAT Act 1994, Schedule 10, paragraph 2(3A).
      30 November 1994 For the purposes of the anti-avoidance measure, the question as to whether a person is connected is to be determined in accordance with the Taxes Act s.839. Definition also provided for ‘fully taxable person’. VAT Act 1994, Schedule 10, paragraph 3(8A).
      1 March 1995 Two further types of supply removed from the scope of the option to tax:  
  • pitches for permanent residential caravans.
  • facilities for mooring residential houseboats.  VAT Act 1994, Schedule 10, paragraph 2(2)(c) and (d).    
      1 March 1995 For option to tax purposes ‘houseboat’ defined. Given same meaning as schedule 8, group 9, item 2. VAT Act 1994, Schedule 10, paragraph 3(7A).
      1 March 1995 The deeming provision in relation to ‘single’ buildings amended. ‘Parades, precincts and complexes divided into separate units’ replaced by ‘complexes consisting of a number of units grouped around a fully enclosed concourse’. Provision now more limiting, specifically aimed at treating modern enclosed shopping precincts as single buildings. VAT Act 1994, Schedule 10, paragraph 3(3).
      1 March 1995 Schedule 10, paragraphs 3(4) & (5) repealed. Now possible for businesses to opt to tax discrete areas of agricultural land. Before 1 March 1995 an option to tax affected all land contiguous to that specified in the option unless separated by non-agricultural land or land in which the business had no interest. VAT Act 1994, Schedule 10, paragraph 3(4) and (5) [up to 28.2.95].
      1 March 1995 Subject to the written consent of the Commissioners an option could be revoked where the time since it had effect was less than 3 months (subject to certain conditions being met) and after 20 years. Prior to 1 March 1995 an option was irrevocable under schedule 10, paragraph 3(6). VAT Act 1994, Schedule 10, paragraph 3(4) and (5) [from 1.3.95].
      1 March 1995 The concession allowed under schedule 10, paragraph 3(6), whereby a business did not have to notify the Commissioners of an option if the sum of all supplies in respect of the property was expected to be less than £20,000 in the next 12 months, was withdrawn. From this date all options had to be notified in order to be legally valid. VAT Act 1994, Schedule 10, paragraph 3(6) [up to 28.2.95]. Notice 742 (1 Jan 1990) paragraph 45.
      1 March 1995 The Commissioners are granted powers to specify automatic permission conditions in a notice. If these conditions are met permission for an option to tax is granted without the need for formal request to the Commissioners. VAT Act 1994, Schedule 10, paragraph 3(9).
      1 March 1995 The special tax point rules set out in schedule 10, paragraph 4 discontinued. Normal tax points applied from 1 January 1995. For any business opting to tax from this date the rent received on or after this date is subject to tax. For example, rent arrears received after the effective date of an option to tax are standard-rated. VAT Act 1994, Schedule 10, paragraph 4.
      26 November 1996 The anti-avoidance legislation introduced on 30 November 1994 ceased to have effect. VAT Act 1994 Schedule 10, paragraph 2(3A)
      1 March 1997 Schedule 10, paragraph 2(3)(a) amended. ‘Registered housing association’ changed to ‘relevant housing association’. Relevant housing association defined. Includes registered social landlords. VAT Act 1994, Schedule 10, paragraphs. 2(3)(a) and 3(8).
      19 March 1997 Where a person intends to use land for the purpose of making a zero rated supply under schedule 8, group 5, item 1(b), the option is not disapplied in respect of the supply to him of the land by virtue of schedule 10, paragraph 2(2)(a) if the parties agree in writing at or before the time of the grant. VAT Act 1994, Schedule 10, paragraphs 2(2A) and (2B)
      19 March 1997 New anti-avoidance measure introduced. The original anti-avoidance measure, paragraph 2(3A), was deleted and has no affect on supplies made after 26 November 1996. The new measure disapplies the option in relation to capital items where the grantor of financer intends that the land will be occupied for other than taxable business purposes. The measure did not operate retrospectively and only affected supplies in relation to leases granted on or after 26 November 1996 with effect from 19 March 1997. It does not apply to leases granted between 26 November 1996 and 30 November 1999 if the terms of the lease were fixed in a written agreement between the parties before 26 November 1996. VAT Act 1994, Schedule 10, paragraphs 2(3AA) and 3A
      19 March 1997 Where an election is made on land already subject to a grant, for the purposes of the subsequent supplies, the grant is treated as made after the date of the election. VAT Act 1994, Schedule 10, paragraph 3(5A).
      19 March 1997 References in paragraphs 2(9) and 3(9) to exempt grants to be construed as references to supplies.  
Note: paragraphs (5A) & (5B) help to define the meaning of the terms ‘grant’ and ‘supplies’ for the purposes of the legislation. This was necessary for the mechanics of the anti-avoidance measure. Both paragraphs are deemed always to have had effect, except in relation to the operation of schedule 10, para. 4 before its repeal. VAT Act 1994, Schedule 10, paragraph 3(5B).    
  10 March 1999 The anti-avoidance measure set out in paragraph 2(3AA) extended to include pre-capital item grants. Businesses are caught by the measure where, at the time of the grant, they intend or expect that the land will become a capital item. Grants made between 19 March 1997 and 10 March 1999 are subject to the new test, with the date of the grant being treated as 10 March 1999 where appropriate. VAT Act 1994, Schedule 10, paragraph 2(3AAA). Also paragraphs 3A(2), 3A(6) and 3A(7).
  1 April 2002 The automatic permission conditions specified in Notice 742A amended. Amongst changes, term ‘day to day overheads’ removed (condition 2), term ‘incidental’ more clearly defined (condition 4). Notice 742A
  18 March 2004 Anti avoidance provisions extended (effective 18 March 2004) to prevent schemes that avoid disapplication of the OTT by transferring taxed leases to special purpose subsidiary businesses. The test at 2(3AA) now includes persons making supplies under a grant originally made by another person (see (a)). A person caught by the new 2(3B) cannot avoid the new provisions by postponing their first supply until after the end of the CGS adjustment period (see (b)).  

Funding the purchase of shares or securities is expressly stipulated to be the provision of funds within 3A(5) (see (c)).

Conditions for a TOGC were also extended. For a transaction to be de-supplied, the transferee must notify the transferor that his OTT was not disapplied by 2(3AA). | VAT Act 94
(a) Sch. 10 para. 2(3B).
(b) Sch. 10 para. 3A(2A)
(c) Sch. 10 para. 3A (5)(cc)
The VAT (Special Provisions) Order 1995 (SI1995/1268)
(d) 5(2A) - requirement to notify.
(e) 5(2B) -notification. | | 1 June 2008 | Schedule 10, including the option to tax provisions, rewritten. Some substantive changes made, including:-
(i) A body corporate can cease to be a relevant associate.
(ii) New certificate regime introduced for buildings converted to dwellings. Introduction of ‘relevant intermediaries’.
(iii) Occupation of land in form of ATMs treated as occupation for eligible purposes for purpose of anti-avoidance provisions.
(iv) No longer possible to opt land and buildings separately - an option on land includes all buildings on the land.
(v) The scope of an option clarified - includes - ‘covered walkway’ defined.
(vi) An option may be revoked:

  • as a result of making a real estate election (REE)
  • under ‘cooling-off’ provisions (extended to 6 months)
  • automatically - no interest for 6 years
  • 20 years after option had effect - automatic permission and prior permission regimes.

(vii) Introduction of real estate elections (REEs)
(viii) Revocations under para 22 and 24 subject to anti avoidance provisions.
(ix) Exclusion of a new building from the effect of the option to tax.
(x) Permission option effective from date of application for permission or later specified date.
(xi) Permission requirement may be dispensed with. | Sch 10 paras 3 and 4
Schedule 10 para 6
Schedule 10 para 16(8)
Sch 10 para 18(3)
Sch 10 paras 18(6) and 18(7)
Sch 10 para 19(3)
Sch 10 paras 22(2) & 22(3)
Sch 10 para 23
Sch 10 para 24
Sch 10 para 25
Sch 10 paras 21 and 22
Sch 10 para 26
Sch 10 para 27
Sch 10 para 29(3)
Sch 10 para 30

  1 May 2009 Automatic permission Conditions for option to tax - condition 3 amended. Notice 742A Box D
  1 August 2009 Conditions for ceasing to be a relevant associate amended in respect of overages. VAT Act 1994 Sch 10 para 3(4)(aa)
  1 August 2009 The time at which a relevant interest is acquired under a REE clarified as time of earliest supply. VAT Act 1994 Sch 10 para 21(13)
  1 August 2009 Commissioners may specify the time that revocation has effect by reference to an event or the meeting of a condition. VAT Act 1994 Sch 10 para 25(8)
  1 August 2009 Anti avoidance provisions (revocation) extended. VAT Act 1994 Sch 10 para 26
  1 August 2009 Time limit for notifications of exclusion of new buildings from effect of the option to tax extended - 30 days after the exclusion is to have effect (or longer period subject to Commissioners’ consent). VAT Act 1994 Sch 10 para 27(4)(za)
  1 August 2009 For the purposes of the anti avoidance provision businesses no longer treated as connected as a result of being controlled by the Crown, Minister, etc. VAT Act 1994 Sch 10 para 34(2A)
  1 April 2010 Introduction of ‘10 per cent Occupation Rule’ - ‘development financier’ in occupation of no more than 10 per cent of a building treated as not in occupation for the purposes of the anti avoidance provision. VAT Act 1994 Sch 10 para 15(3A) and 15A
  1 April 2010 The meaning of ‘relevant housing association’ amended to include ‘a private registered provider of social housing’. VAT Act 1994 Sch 10 para 10(3)
  1 March 2011 Introduction of ‘2 per cent Occupation Rule’ - grantor in occupation of no more than 2 per cent of a building treated as not in occupation for the purposes of the anti avoidance provision. VAT Act 1994 Sch 10 para 15(3A and 15A