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Option to Tax acknowledgement - can anyone explain a point noted in acknowledgment letter?

tgj1961
1 month ago

In letters from HMRC received this week acknowledging our recent Option to Tax notifications on three properties, the following same point was noted on all 3 letters (leading me to believe this is part of the standard wording they include on all acknowledgement letters?):

"Your option to tax may not make taxable a grant of the land/property which is, or is expected to become, a capital item as per Regulations 112 to 116 of the VAT Regulations 1995."

All of these properties cost or will cost over £250,000 to build so all of them will be capital items, subject to the Capital Goods Scheme 10 years adjustment periods.
Two of them, and possibly part of the third, will be leased to Third Parties, hence our Option to Tax.

Can anyone please explain to me what the HMRC note is referring to?   I assume - and very much hope - it cannot mean we cannot make the rent for these properties taxable?   I have read regulations 112 to 116 and regretfully have no more understanding of the meaning of this note than before.

If someone can explain this to me - perhaps with a scenario where this would apply? - I would be very grateful.

Regards.

  • 1 month ago

    Their wording is a little misleading … they only mean it "may" not apply, rather than it "will" not apply! It is connected to the anti-avoidance rules, which are a bit clearer in section 13 of notice 742A than they are in the legislation.  Most "normal" arrangements shouldn't be caught and the option to tax will be fine, but worth quickly checking the details of your cases against the test in section 13.2 of the notice to be certain.

    A scenario where it may apply?  Say company A who only make exempt supplies wants to build their new headquarters.  If they build it themselves, they wouldn't be entitled to any VAT recovery.  So they provide a loan to company B, who opts to tax the site, constructs the building and enters into a long term lease to company A.  Without the anti-avoidance rules, company B would be entitled to full VAT recovery due to the standard rated rent received, and company A has effectively spread the VAT cost over many years/decades!  So the anti avoidance rules would disapply company B's option to tax in these circumstances, preventing VAT recovery on their construction costs.