This brief explains HMRC's revised interpretation of ‘occupation’ for the purposes of the option to tax anti-avoidance legislation. This follows the release of the judgment in Newnham College

The case before the House of Lords concerned whether Newnham was ‘in occupation’ of the college library. If they were, their option to tax the library would be disapplied and their occupation would be for the purpose of making supplies of exempt education. Consequently, the VAT incurred on the rebuilding and refurbishment of the library would be irrecoverable.

The House of Lords upheld the judgment of the Court of Appeal and found in Newnham's favour. They concluded that Newnham was not in occupation and, as a result, that their option to tax was not disapplied.

HMRC now accept that physical presence alone is not the correct test of occupation for the purposes of what is now VATA 1994 Schedule 10 Paragraphs 12 to 17 (the ‘anti-avoidance test’). Following the House of Lords judgment, a person is considered to be ‘in occupation’ if, in addition to physical presence which occupation normally entails, they have the right to occupy the property as if they are the owner and to exclude others from enjoyment of such a right. This means a person must have actual possession of the land along with a degree of permanence and control.

Businesses that were wrongly denied input tax recovery may submit claims to their local Business Advice Centre. These will be subject to a three-year limitation period (four years from 1 April 2009, subject to a transitional period). All such adjustments or claims must take account of any underdeclared output tax as a result of incorrectly treating the option to tax as disapplied.

Full details of the case and HMRC's treatment is available at Section 2.05 below.