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HM Revenue and Customs Brief 03/11

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HM Revenue and Customs -Tax Authorities

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Issued 24 January 2011

VAT: Changes to the option to tax for supplies of land and buildings (anti-avoidance rule)

The introduction of a new ‘2 per cent occupation rule’ and a change to the way that occupation by reference to Automatic Teller Machines is treated. See The Value Added Tax (Buildings and Land) Order 2011 (SI 86/2011)

1. Introduction

This Brief explains minor changes which are being made to the option to tax anti-avoidance rule. Currently the option to tax is disapplied where the grantor, or a person connected to the grantor, is in exempt occupation of the land (and the other conditions in the anti-avoidance rule are met). The changes to be introduced from 1 March 2011 mean that an option to tax will no longer be disapplied where the grantor or persons connected with the grantor only occupy minor parts of buildings (no more than two per cent) even if the other conditions of the anti-avoidance rule are met.

The treatment of Automatic Teller Machines (ATMs) is also being amended. From 1 March 2011 occupation of any building which is solely by way of ATMs will not be treated as occupation for the purposes of the anti-avoidance test.

2. Who needs to read this?

Anyone who makes supplies of land and buildings which are subject to the anti-avoidance rule in VATA 1994 Schedule 10 paragraphs 12 to 17. See Notice 742A Opting to tax land and buildings section 13 for details about how the rule works and transactions that are likely to be affected.

3. Background

Under the anti-avoidance provision in Schedule 10 of the VAT Act, an option to tax is disapplied where two key tests are satisfied:

  • the grantor is a developer of the land
  • the grantor or development financier intends or expects that the land will become 'exempt land'.

As a result of the disapplication of an option, the grantor’s supplies are exempt from VAT. This can affect the amount of VAT the grantor is able to reclaim on costs.

The amendment concerns the second of the above tests – the meaning of 'exempt land'. Under paragraph 15 of Schedule 10 VATA 1994 land is 'exempt land' if it is to be occupied by the grantor, the 'development financier' (a person who has provided finance for the purchase or development of the land) or a person connected to either the grantor or financier, and the occupation is not 'wholly or substantially wholly for eligible purposes'. To be in occupation for eligible purposes a person must be making predominantly taxable supplies (or supplies which entitle the person to input tax recovery). 'Wholly or substantially wholly' is defined as at least 80 per cent.

The mechanistic nature of the anti-avoidance test has resulted in concerns about the effect of the measure on certain transactions. Following representations to HMRC the test was amended from 1 April 2010 and a new 'ten per cent occupation test' was introduced. This allowed occupation of no more than ten per cent of a building by a person providing finance for its purchase or development to be ignored. HMRC have subsequently been made aware of instances where minor occupation by the grantor (or a person connected to the grantor) can cause an option to be disapplied even though there is no deliberate attempt to avoid tax. The change, which is effective from 1 March 2011, addresses that concern by introducing a further 'two per cent occupation rule' applicable where the grantor himself or a person(s) connected to the grantor is to be in occupation. The new rule supplements the existing ten per cent rule.

4. Details of how the new ‘2 per cent occupation rule’ works

Occupation of any part of a building by the grantor (even a very small proportion) normally counts as occupation for the purposes of the anti-avoidance test and can result in the option to tax being disapplied. From 1 March 2011 all supplies arising from grants made on or after that date will be subject to the new ‘two per cent occupation rule’. Under the proposed change a grantor is not treated as in occupation where the conditions of the ‘two per cent occupation rule’ are met (the conditions largely mirror those of the existing ten per cent rule). The rule works as follows:

  • there must be no intention or expectation at the time of the grant that the grantor or a person connected with the grantor will occupy more than two per cent of any building (part or all of which is included in the grant) at any time during the grantor’s CGS adjustment period. Where the grantor is in occupation together with a person connected to them, it is the combined occupation that counts towards the two per cent threshold, unless the occupation by either person meets the eligible purposes test in Schedule 10 paragraph 16
  • the proportion of the building occupied is to be calculated in relation to the whole of the single building (not just that part that is subject to the grant) or, where the grantor holds an interest in only part of the building, that part in which an interest is held immediately prior to the grant being made (this includes any part of the building in which an interest is held by a person(s) connected to the grantor
  • where a number of buildings are included in the same grant, the rule is applied to each building on an individual basis. Where the two per cent threshold is exceeded in relation to any of the buildings, the conditions of the rule are not met. For the purpose of the rule a single building takes its meaning from VATA 1994 Schedule 10 sub-paragraphs 18(4) to (7)
  • the rule is not satisfied where the person(s) occupy any land included in the grant which is not a building. However, occupation of land that falls within the curtilage of the building or is used for parking vehicles can be disregarded as long as such occupation is ancillary to the occupation of the building
  • for the purposes of calculating the percentage of the building occupied by a particular person the practices set out in the RICS 'Code of Measuring Practice' are to be used. Section 13 of Notice 742A Opting to tax land and buildings contains tertiary legislation setting out detailed rules about how the Code is to be applied. Further details about the method of calculation are given in paragraph 13.8.6 of Notice 742A Opting to tax land and buildings. As with the 10 per cent rule, HMRC will only require evidence of the calculation in cases where the area occupied is close to two per cent (between 0 and 7%)
  • like the ten per cent occupation rule, the rule is based on the intention or expectation of the grantor at the time the grant is made and involves a forward look over the ten year period of the CGS. Where it is known at the time of the grant that further grants will be made, the calculation must take account of the occupation that will result from those grants. The test is, however, a one-off test at the time of the grant

5. Occupation by reference to ATMs

The way that occupation by reference to Automatic Teller Machines (ATMs) is treated will also be changed. Currently, occupation which is solely in the form of ATMs is treated as occupation for ‘eligible purposes’ under Schedule 10 sub-paragraph 16(7). This means it can be ignored for the purposes of the anti-avoidance test. From 1 March 2011 an amendment to paragraph 15 of Schedule 10 will mean that occupation of any building which is solely by way of ATMs will not be treated as occupation for the purposes of the anti-avoidance test. As a result, sub-paragraph 16(7) will not be required and will be repealed.

6. Further Information

Further information can be obtained from the HMRC website or by contacting the Helpline on 0845 010 9000


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Article Published/Sorted/Amended on Scopulus 2011-01-26 14:13:18 in Tax Articles

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