30 May 2008

Changes to the VAT Option to Tax Regime - Frequently Asked Questions for Commercial Property Owners

1. What is an Option to Tax?

The sale or lease of UK land is generally exempt from VAT. However, commercial property owners are able to opt to charge VAT when selling or leasing their property so as to enable them to recover the VAT costs associated with construction or development.

2. Will there be more flexibility in opting to tax?

Probably, yes. As before, you can opt to tax defined areas of land by reference to a plan or title number at H M Land Registry. However, following the changes, it will also be possible to opt to tax land by reference to a generic description, for example, any land in the City of London.

3. Is it true that I will be able to make one election for all land that I may acquire in the future?

Yes. It will be possible to make a single election that has the effect of automatically opting all UK property interests that you acquire after the date of the election.

4. Is it more difficult to revoke an option if I change my mind?

Yes and No. The cooling off period has generally been extended to 6 months and so an election can be revoked in that period. However, you will not be able to revoke an election if you have made any use of the property even if you have not made a VAT reclaim.

5. What if I change my mind after the cooling off period?

As before, the option can be revoked after 20 years has elapsed. There are now more detailed rules as to the circumstances in which this is possible. An option to tax was first possible in 1989 and so options made in that year could in theory be revoked in 2009.

6. I have heard that if I no longer own the property the option will automatically lapse. Is this true?

Yes. Any option to tax will now automatically fall away if the person who opted has not had a relevant interest in the land for 6 years.

7. Is it true that I can disapply an option on a sale if the property is to be converted to residential use even if I do not intend to do the conversion myself?

The rules to disapply an option have been widened. Provided a purchaser either intends to convert the property to residential use himself or intends to sell to a person with an intention to convert the property to residential use, the option may be set aside.

In theory, there could be an infinite chain of disapplications affecting a single property provided each purchaser has the requisite intention.

8. When do these changes come into effect?

The new rules are scheduled to take effect on 1 June 2008.


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