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Changes to the VAT option to tax

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9th Jun 2008
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The VAT option to tax rules changed on 1 June 2008.

An option to tax:
Supplies of land and buildings, such as freehold sales, leasing or renting, are normally exempt from VAT. This means that no VAT is payable, but the person making the supply cannot normally recover any of the VAT incurred on their own expenses.

An owner or tenant can instead opt to tax land and buildings, and then all the supplies made of his interest in the land or buildings will normally be standard-rated with the ability to recover any VAT incurred in making those supplies.

The main changes are as follows.

  • new rules providing that an option to tax affects land and buildings on the same site, with transitional rules, and ability to exclude new buildings from the scope of an option to tax (section 2).
  • new certificate for buildings to be converted to dwellings etc and new ability for intermediaries to disapply the option to tax (section 3)
  • new certificate for land sold to housing associations (section 3)
  • new rules for ceasing to be a relevant associate of an opter (section 6)
  • extension to the ‘cooling off’ period for revoking an option to tax (section 8)
  • introduction of automatic revocation of the option to tax where no interest has been held for 6 years (section 8)
  • introduction of rules governing the revocation of an option to tax after 20 years (section 8)
  • revised definition of occupation for the anti-avoidance test including new exclusion for automatic teller machines (section 13)
  • introduction of a new way to opt to tax (a real estate election) (section 14).

Revised form “Option to tax”

Guidance from HMRC:Opting to tax land and buildings

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