VAT – Buildings & land, option to tax

A new Schedule 10 to the VATA 1994 comes into effect on 1 June, replacing the entirety of the existing schedule. The schedule will be supplemented by a new Notice 742A and a selection of forms, the use of which will be mandatory; these items are promised by the Revenue for release for the beginning of June, and have been trailed in Information sheet 03/08.

The new schedule removes some obsolete provisions but also introduces wholesale changes to the election to waive exemption; not the least of which is to jettison the term in favour of the adoption of the "option to tax".

The changes to the option to tax regime include:

* Where permission is required to opt due to exempt supplies having previously been made, only such supplies in the preceding 10 years will now be relevant.

* The facility to elect on manifold properties by blanket description is removed, although existing arrangements will continue to be recognised. In its place, a global election by geographical area will be permitted or, alternatively, a Real Estate Election can be made. A REE will cause all post election acquisitions to be opted by default, but with the acquirer having the ability to override, and revoke the option, in respect of specified properties.

* The cooling off period for the revocation of an option will be extended to 6 months from the effective date of the option. The ability of the opter to revoke when, in the interim, input tax has already been recovered, is not entirely clear.

* Where a conversion of a commercial property to residential is contemplated, the vendor's option will be disapplied only where the purchaser issues the vendor with a certificate, confirming the intention of the purchaser to convert the property for residential use. Where the immediate purchaser is an intermediary, who intends to sell on to another party for development, it will be theoretically possible to have a chain of certifications although this might prove to be unworkable in practice.

* The doubts between Revenue policy and the law, per Breitsohl, in distinguishing between land and the buildings thereon, will be removed. Moving forward, it will be possible to opt land, but not buildings to be constructed thereon, provided certain criteria are satisfied. Where, under existing policy, a buildings only election has been made, the benefit of the existing Revenue concession will continue whereby the option will expire upon demolition of the building.

* The rules for the revocation of an option after 20 years; which will become possible from August 2009 and will be of particular interest to landlords of buildings let to tenants in the insurance, banking and similarly exempt sectors.

Whilst it will most probably take a couple of years, if not more, for this new system to settle down, and with there being refinements along the way, it does, nevertheless, look to be a considerable improvement on the outgoing rules.