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Construction, Land and Property

The Option To Tax – a tragedy in three parts


HMRC (and previously HMC&E) have always treated the Option to Tax process and records as a tidying the attic chore; always for another day.

OTT Unit

It has now got to the point where the attic is threatening the whole structure so what’s been their approach? Unfortunately, it seems to be a “seal and contain” mission without the acro props being put in.

From 1 February 2023 HMRC will no longer respond to notifications of options to tax submitted to them. If the application is made by email, you will get a generic response from the email address. If you make the application by post, you will get nothing. 

It seems that even if the applications seem incorrect (a recent issue where we are acting for the buyer) there will be no response from HMRC. So, when it comes to a transaction where the seller’s option was submitted to HMRC after 1 February 2023, make sure that the evidence they have is reasonable to assume that the option has been correctly notified.

The Option To Tax and Anti-Avoidance

Anti avoidance legislation, by its very nature, often has unintended consequences. A piece of law written to prevent a specific act does not (and cannot) foresee where the legislation may impact outside of its intended target.

To miss out on a whole raft of subtleties this case concerned legislation in Schedule 10 of the 1994 VAT Act. This disapplies an option to tax made by a party where the property is within the Capital Goods scheme, the supply of that property is intended to be made to a related party (including a party related to the financier) and that related party is substantially partially exempt.

In 2001, the taxpayer purchased a property from an unconnected party. The property had been subject to an option to tax and therefore VAT was paid on the purchase price. The taxpayer then opted to tax the property and recovered the VAT charged. The taxpayer then leased the property to a connected party, (an opticians), charging VAT on the lease. After a VAT inspection in 2007, the taxpayer was told that this supply should not have been subject to VAT as the option to tax was disapplied by virtue of the fact that the parties were connected, and the optician business was substantially exempt.

In 2014, the taxpayer sold the property to a property leasing business (C) with the benefit of the lease to opticians. C was not connected to the taxpayer, was not at that time registered for VAT, and did not make any option to tax. The taxpayer did not charge VAT on the sale, but HMRC issued an assessment on the grounds the sale was subject to VAT at the standard rate. The question, for the court, was whether the provisions in the VAT Act disapplied the option to tax so that the sale to C was not subject to VAT.

Such is the way the law is set put if the taxpayer intended to charge VAT on this sale to C, the disapplication was invoked, and no VAT was due. If the taxpayer did intend to charge VAT then the disapplication applied and no VAT was due.

A real Catch-22. The Supreme Court (it had already been through First and Upper Tribunals although why anything so complex would be seen as a First Tribunal case appears odd) had the job of interpreting the law to give effect to Parliament’s intention.

The taxpayer argued that as the grantor they had an expectation that:

  • There was a supply of land
  • that land was subject to an Option To Tax so the price would include VAT; and
  • That price was over £250,000.

This meant that the property would be a Capital Goods Scheme asset so the option was disapplied.

The Court ruled (by a majority) that the true construct of the law was that it was not what the grantor (the taxpayer) expected but what was expected to happen to the property in the hands of the “relevant transferee” (C). On this basis C would not incur a VAT bearing capital asset so the option was not disapplied and VAT was due.

The purpose of this piece is to highlight the complexity, especially where Schedule 10 anti-avoidance can apply. Most transactions walk into these bear traps rather than being the result of complex tax planning.

The key issue is always consider the full picture for VAT.

Valid Option To Tax?

A business submitted a notification of an option to tax after a VAT visit. It had been making exempt supplies with the property for a couple of years but ticked the “no previous exempt supplies” box on the VAT 1614A. HMRC asked about previous supplies and again the taxpayer said no exempt supplies had been made. Oddly, the visiting VAT officer did not inform the OTT unit that there had been previous exempt supplies.

Several years later the taxpayer sold the property but did not charge VAT on the sale. HMRC assessed for the VAT, but the taxpayer did not appeal the assessment, it said that the OTT was not valid as they had made an incorrect declaration. On the basis that it had make previous exempt supplies, the rules at the time would have required written permission from HMRC. Without that permission the taxpayer said that there was no valid option.

There is a little used provision in the law (VAT Act 1994, Schedule 10, para 30) that enables HMRC to retrospectively dispense with the requirement for prior permission and treat such an option as if it had been validly exercised. HMRC applied this rule and therefore there was a valid option in place at the time of the sale.  It was this action that the taxpayer appealed.

This raised two issues for the Tribunal. The first was that under VAT legislation the Tribunal did not have the relevant powers to consider the matter and that the proper approach was for a Judicial Review. But the Tribunal went on to say that if it were allowed to rule on this matter, the taxpayer had declared twice that it had not made exempt supplies. The fact that it had did not mean that HMRC had acted reasonably and that as such the option was valid.

It has not been noted if the exempt supply issue was a deliberate ploy by the taxpayer at the time of the application or if this was seen as an opportunity to challenge the existence of the option post sale. Either way it seems that the taxpayer will not succeed in the challenge, but as of now (post 1 February 2023) how would such a case play out with HMRC not responding to any applications?

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