More changes to the option to tax

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On 1 June 2008, a new version of VATA 94 Schedule 10, covering the option to tax, was introduced in order to bring more clarity and simplifcation to a set or provisions, which had been widely misunderstood and often abused.

Since then, HMRC have continued to consult with affected businesses and have now announced three further, albeit minor, changes, effective from 1 April 2010, aimed both at simplifying the law even more and facilitating business needs.

The three changes are as follows:

Where a person has provided finance for a development, its occupation of up to 10 per cent of the development will now be ignored for the purposes of the option to tax anti-avoidance provisions.

Once an option has been made, there is normally a 6-month ‘cooling off’ period during which the option can be revoked, but until now it has been a condition that the relevant land must not have been used. That condition is now being removed.

Following the implementation of the Housing and Regeneration Act 2008, the definition of a ‘relevant housing association’ has been changed, so far as it relates to the disapplication of the option to tax on land to be used for residential development, where the housing association gives the seller a written declaration of its status. The term ‘registered social landlord’ in the definition will be replaced by ‘private provider of social housing’, but so far as it relates to England only, in order to ensure consistent application of the appropriate VAT reliefs throughout the UK. A similar change will be made to VATA 84 Schedule 8 Group 5 Item 3 and Note (21), which zero-rates the conversion of non-residential buildings into residential buildings. In that case, the reference to Scottish associations will also be updated.

Although the legal language in this highly complex area has been made easier to understand and a few new provisions have been introduced to ‘facilitate business needs’, it is essential that businesses take utmost care in applying the rules, as errors could still be very expensive.

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