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HM Revenue and Customs Brief 50/10


HM Revenue and Customs -Tax Authorities

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Issued 6 December 2010

VAT: Proposed 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'


This Brief announces a four week consultation on draft legislation (see Annex A) which seeks to amend part of the option to tax anti-avoidance test for supplies of land & buildings contained in VATA 1994 Schedule 10 paragraphs 12 to 17. This Brief explains the proposed changes and invites comments. Subject to the consultation it is intended that the changes will be introduced in early 2011.

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.


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 intend or expect that the land will become 'exempt land'

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

The proposed amendment concerns the second of the above tests Ė 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 '10 per cent occupation test' was introduced, whereby occupation of no more than 10 per cent of a building by a person providing finance for its purchase or development is ignored. HMRC have now been made aware of instances where minor occupation by the grantor (or a connected person of the grantor) can cause an option to be disapplied even though there is no deliberate attempt to avoid tax. The proposed change addresses that concern by introducing a further '2 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 is in addition to the existing 10 per cent rule and does not replace it.

How will the '2 per cent occupation rule' work?

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. Under the proposed change a grantor is not treated as in occupation where the conditions of the '2 per cent occupation rule' are met (the conditions largely mirror those of the existing 10 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 2 per cent of any building (or part of a building) included in the grant at any time during the grantorís 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 2 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 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 2 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. Further details about how this is applied are set out 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 2 per cent.

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 can be disregarded as a result of Schedule 10 sub-paragraph 16(7). Under the proposed changes the reference to ATMs in sub-paragraph 16(7) will be replaced by new references in paragraph 15. In future, occupation of land which is solely by reference to ATMs will not be treated as occupation for the purposes of the anti-avoidance test. In addition, occupation of any building which is solely by way of ATMs will be ignored for the purposes of both the 2 per cent and 10 per cent rules.

Why are we making these changes?

Following discussions with trade representatives and business we believe the changes will be seen as a welcome practical simplification of the anti-avoidance test. The amendments to paragraph 15 of Schedule 10 should ensure that the option to tax is not disapplied in cases where a grantor occupies very minor parts of buildings and should, as a result, help to facilitate business.


If you would like to make any comments about the draft legislation please email Michael McLachlan by 3 January 2011.

Further Information

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

Annex A

Draft Statutory Instrument and Explanatory Note : The Value Added Tax (Buildings and Land) (No 2) Order 2010 (PDF 21K). Amendments to paragraphs 15 and 16 of Schedule 10 VATA 1994.

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Article Published/Sorted/Amended on Scopulus 2010-12-08 14:24:53 in Tax Articles

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