Improvements to the Theme Park that is VAT - 08/12/2008
Quote:
Lord Justice Sedley in the case of Royal & Sun Alliance Insurance Group plc v Customs & Excise Commissioners [2002]
“Beyond the everyday world ………………….. lies the world of VAT, a kind of fiscal theme park in which factual and legal realities are suspended or inverted.”
The law on VAT and the option to tax has been rewritten and the changes take effect on 1 June 2008. The changes are brought about by The Value Added Tax (Buildings and Land) Order (SI 2008/1146) that became law in April 2008. This order creates a replacement to Schedule 10 of the Value Added Tax Act 1994 that deals with the option to tax and change of use of residential and charitable buildings. We will leave you to decide if the government’s intention of making the legislation “clearer and easier” to understand has worked but there are some significant new provisions that enable businesses to:
make an election that will automatically apply to all properties acquired by the opter and its VAT group
revoke an option to tax within the first six months of exercising it without needing HMRC permission
revoke an option to tax after 20 of exercising it without needing HMRC permission
Businesses by making an election have for some time had the option to waive the exemption that the supply of land and buildings enjoys in order to recover input tax incurred on supplies made to the business. For the most part the substance of the current rules remain unchanged but the new Schedule 10 contains significant new provisions, amendments and repeals.
In this article we consider some of the more significant changes and helpfully HMRC has published a brief 24/08 that explains the main items that are new or have been changed. These include the following:
Some flexibility to enable a relevant associate of an opter to cease to be classed as one if “basic conditions” are met and without the need for prior permission from HMRC.
The replacement with a certification process by the buyer in place of the current agreement process between the seller and the buyer to disapply commercial property that is to be converted to residential property.
The creation of “Real Estate Elections” that if made apply the option to tax automatically to all land and buildings that the opter and members of its VAT group acquire without the need to notify individual options to HMRC. Such an election is irrevocable (except where HMRC decides to do so if the opter fails to supply specified information). The effect for large groups holding many commercial properties this is a welcome simplification of the administrative process. In order to avoid the automatic application of the option to tax the property will have to be acquired by a company that is not a member of the VAT group of the opter and that itself has not already made a real estate election. It should also be noted that the option in the first six months to withdraw the option is not available to a buyer who has made a real estate election if the buyer has used the property within that cooling off period.
The ability to use the six month cooling off period (the current period is three months) is subject to the conditions that the taxpayer has not used the land, no input tax has been recovered and no VAT has become chargeable, there has been no transfer as a going concern and the prescribed form of notification is used. If any one of the automatic conditions have not been met it is still possible to revoke the option with HMRC prior consent but this may be subject to conditions imposed on the taxpayer by HMRC usually in relation to input tax adjustments.
Subject to anti-avoidance measures the option to tax will automatically lapse after 6 years where the opter has held no interest in, right over or licence to occupy the land or buildings.
If the automatic lapse provisions set out above do not apply the election can only be revoked after twenty years has elapsed. The revocation is automatic if certain conditions are met and written notification has been given to HMRC. If the conditions are not met HMRC permission to revoke is required.
Modification of the rules in relation to the making of exempt supplies prior to the making of the option to tax with and without HMRC permission.
There are new rights of appeal against the refusal by HMRC to grant consent or to exercise its powers.
Confirmation that an option to tax land includes any building that is or was constructed on the land and so there is now to be no ability to opt to tax land and buildings separately. As a transitional measure it is possible to treat the option as revoked if the building is demolished.
If an option to tax land has been made and a new building is constructed on the land then it will be possible to exclude the new building and its curtilage from the option. Notification of revocation must be given prior to the earliest of a) the first grant of an interest in or in any part of the new building, b) when part of all of the new building is first used, c) the date when the building is completed.
Conclusion
The consensus appears to be that this rewrite of Schedule 10 is in the most part helpful and therefore welcome largely because there is more clarity and flexibility to the rules.
Of concern is the power given to HMRC to issue public notices that have effect in law as if parliament had passed the legislation, this might cause problems for taxpayers who rely on the terms of the legislation without knowing all of the conditions applicable to the option and such notices are not subject to any reasonableness test.
Whilst Dunham Solicitors does not offer specific tax advice, we in the property department keep up to date with latest developments and are able to work closely with our client’s tax advisers to meet our client’s expectation of ensuring that property transactions are undertaken in tax efficient manner.
