VAT: Land and buildings – new Schedule 10 of the VAT Act 1994 including changes to the option to tax

This Brief announces the introduction of a new Schedule 10 to the VAT Act 1994 that becomes effective from the 1 June 2008 following the announcement in Budget Note 79 at Budget 2008.

Background

Schedule 10 to the VAT Act 1994 deals primarily with the option to tax supplies of land and buildings and was introduced following the European Court's ruling that the UK had to tax the construction of non-domestic buildings. Following a series of amendments needed to block various avoidance schemes; this legislation has become increasingly more complex to follow. The new Schedule 10 has been rewritten in the Tax Law rewrite style, which greatly improves the layout of the legislation as well as simplifying the language.

In addition, in 1995 changes were made to Schedule 10 that allowed revocation of an option to tax 20 years after it had been made. This means the first options eligible for revocation will take place in 2009. This new legislation therefore also includes the rules for revocation and also some changes necessary for its smooth operation. Finally, in line with suggestions received from business, the new legislation includes several changes designed to facilitate business.

During its development, this new legislation has been subject to two public consultations in 2004 and 2005 and legislation was introduced in the Finance Act 2006 to enable the existing Schedule 10 to be replaced by statutory instrument. A further, limited consultation on the initial drafts of the proposed legislation took place in August 2007 with all those who replied to the earlier public consultations.

What is being published?

In addition to a Treasury Order being laid containing the new Schedule 10, we are also publishing an Information Sheet 03/08 which includes guidance for the changes, together with the tertiary legislation (elements of the guidance which have the force of law). This document also includes destination and derivation tables to help business navigate its way around the changes.

An update to Public Notice 742A Opting to tax land and buildings, to include the material in the Information Sheet, will be issued within two months.

Legislative changes

The following areas have changed or are new:

• new rules for relevant associates
• introduction of certificates to disapply an option to tax for buildings to be converted into dwellings and land supplied to housing associations
• introduction of disapplication of the option to tax for intermediaries supplying buildings to be converted into dwellings etc.
• revised definition of occupation, including a new exclusion for automatic teller machines
• introduction of a new way to opt to tax (a real estate election) which does not require individual notifications of each option (see other changes section below)
• extension and changes to the cooling off period
• automatic revocation of an option to tax after six years if no interest has been held in a property during that time
• introduction of rules governing the revocation of an option to tax after 20 years
• provision that in future, an option to tax applies to both the land and buildings on the same site-with a special transitional rule for existing options
• a new ability to exclude a new building and land within its curtilage from an option to tax
• new appeal rights
• repeal of legislation concerning the developer's self supply charge and developmental tenancies (Item 1(b) of Group 1 of Schedule 9 to the VAT Act 1994) and also co-owners of land (section 51A of the VAT Act 1994)

Explanation of these changes

All the Schedule 10 changes are fully explained in Information Sheet 03/08 which includes guidance on each change together with tertiary legislation where appropriate. New forms which will have the force of law will be produced before 1June, to support and allow the smooth operation of the new rules.

Other changes

At present, a small number of taxpayers, typically large taxpayers, have what has become known as a global option to tax. This option to tax is effectively an option on the whole of the UK, and is typically expressed as follows:

‘I opt to tax the whole of the UK’ or more commonly ‘I opt to tax all the land I currently own and all that I acquire in the future’.

While there is no problem with retaining these global options, HM Revenue & Customs (HMRC) has in some cases, by concession, allowed the cooling off period to apply to each property as it is acquired. Under the normal rules, the cooling off period can only apply to the option to tax itself and so should expire three months after the option was made (this will be extended to six months from 1 June 2008). Because of the introduction of the new real estate election, this concession will be withdrawn with effect from 31 July 2009. This should allow sufficient time for those with a global option to decide whether to retain it without a cooling-off period in future, or to convert their global option into a new real estate election.

Further information

Further information can be obtained on HMRC's website or through the National Advice Service (NAS) on Tel 0845 010 9000.

Information Sheet 03/08 providing guidance and further detail is available and will supersede or compliment existing guidance as appropriate. A new Notice 742A Opting to tax land and buildings and new guidance will be available as soon as possible.