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HMRC internal manual

VAT Partial Exemption Guidance

Other Partial Exemption issues: changes in intention or use: intentions and property

Prior to the decision of the Tribunal in the case of Beaverbank Properties (VTD 18099), HMRC maintained that, where an option was needed to make supplies taxable, then a taxpayer could only have an intention to make taxable supplies once an option was in place. HMRC now accept that a taxpayer can have an intention to make taxable supplies before an option is in place, even though the taxable supplies cannot occur until after the option is made. However, clear documentary evidence of taxable intention is essential.

Suitable evidence includes documents involving third parties that consistently show a firm commitment to make taxable supplies. For example, a document accepting a bank loan on the basis that taxable supplies will be made. Further information on the types of evidence that would be suitable is given in Notice 742A Opting to tax land and buildings. However, in most cases, the best evidence of taxable intention remains an effective option to tax.

A firm commitment to make taxable supplies is essential before there can be a taxable intention where the normal liability of planned supplies is exempt. In particular, where property is to be let and the taxpayer is keeping his options open as to whether to opt or not, a taxable intention does not exist.

HMRC recognise that property developers often look at many sites in connection with a taxable project and that it may be onerous to immediately opt them all. As projects progress through acquiring an interest in the land and doing necessary work to active marketing, the weight of evidence needed to substantiate a continuing taxable intention without an option will increase. At the same time any commercial reasons to put off opting will decrease. Where a taxpayer is actively marketing a property HMRC view the lack of an option as strong evidence that the taxpayer is merely keeping his options open as to whether to opt and that a taxable intention does not exist.