Customs news

VAT and property

In the Pre-Budget Report, the Government announced two new consultations, one on a re-write of existing law in VATA 1994, Sch 10 (buildings and land) and the other on the VAT treatment of beneficial ownership of land (VATA 1994, Sch 10 para 8). The closing date for contributions for both consultations is 28 February 2006.
In addition, it unveiled the outcome of 'The future of the option to tax consultation'. The facility to elect to waive exemption on supplies of commercial property, known as 'the option to tax', was introduced from 1 August 1989. Changes in 1995 allowed an option to tax to be revoked after 20 years, or within three months of being made, subject to the written consent of HMRC being obtained. Options will therefore first become eligible for the 20-year revocation from 1 August 2009.
In order to help businesses plan for the future, HMRC have announced the proposed conditions under which written consent to revoke an option to tax will be given, together with changes to the other related issues covered by the consultation.

Automatic consent
HMRC will automatically provide written consent once a taxpayer has certified that all the stipulated conditions are met. HMRC intend to make available a draft certificate on their website although other formats will be acceptable if all the necessary information is provided. The proposed conditions that must be certified as met are that:

• no pre-payment has been made covering any supply of goods or services for more than the next six months following the date of revocation;
• no capital item is held (HMRC recognise that many properties may not fulfil this condition and so will be exploring a possible solution);
• any rents charged have not been under-valued, and no balloon payments fall due at any time after the proposed revocation;
• the taxpayer held an interest in the property at least 20 years prior to revocation and that the property was subject to the option to tax at that time.

These conditions may be amended, deleted or added to with appropriate notice being given. Business will also be required to provide the following information on their certificate:

• a clear description of the property;
• evidence of the date of the original option;
• proposed effective date of revocation;
• a named authorised signature (sole proprietor, partner, company secretary, trustee, director, or a signed letter of authority from one of these persons).

The effective date of the revocation will be the date of posting of the certificate.

Permission consent
Most revocations are likely to be by automatic consent, however, HMRC may still grant consent in cases where a business fails to meet one or more of the stipulated conditions of automatic consent, provided that it does not gain a tax advantage other than future supplies of the property being VAT-free. An example might be where a taxpayer meets all the conditions for consent except that they have a pre-payment in place for the next five years cleaning services. If at the time the input tax was incurred on the cleaning services, the taxpayer apportioned the input tax so that only the input tax relating to services used before revocation was recovered, HMRC would still grant consent. In any application for permission consent, a business will need to provide the following in the form of a certificate:

• a clear description of the property;
• evidence of the date of the original option;
• certification of those conditions that are met;
• full details of the conditions that are not met and why consent should still be granted;
• a named authorised signature.

The effective date of the revocation of the option will be the date of HMRC's letter agreeing to revocation on completion of their consideration of the individual circumstances and acknowledged acceptance.

Error correction and penalties
If any information provided on a certificate is subsequently found to be incorrect, HMRC will be able to restore the original option with effect from the date of revocation. They will always take such action where written consent to revoke an option would have been refused if the correct information had been provided. This restoration of the option will make all supplies that have been treated as exempt from the date of revocation taxable and subject to an appropriate VAT assessment plus interest.
Where an incorrect certificate is issued, either due to lack of care or deliberately, a penalty will be applied. The development of appropriate forms of penalty is being considered as part of the wider review of HMRC's powers and appeal rights.

Re-options
There will be no cooling-off period allowing the original option to be reinstated, but there will be nothing to prevent the business making a new option on the property.

Early revocation
Providing certain conditions have been met, current legislation allows businesses to revoke an option to tax in the first three months after electing. The Government intends to increase this period to 12 months, subject to the same conditions as currently apply.
While HMRC have so far been unable to identify a fair method of early revocation, they will continue to explore options.

Position of tenants
It is not proposed to impose a condition requiring a landlord to inform a tenant that they have revoked their option.

Other issues
It will not be possible to revoke an option on a single property held under a global option. If those with a global option wish to revoke, they can only do so by revoking the entire global option. However, it will not be possible to revoke a global option that includes properties that were acquired less than 20 years ago. Thus HMRC intend to introduce the universal option. Any taxpayer that chooses the universal option will automatically opt to tax each property as it is acquired and the 20-year revocation clock will therefore run from the date of each property's acquisition. As with global options, properties requiring HMRC's permission to be opted to tax are excluded from the universal option.
Businesses currently holding global options will be able to convert their existing global option to the new universal option. The length of time individual properties have been held under an existing global option will be retained under the new universal option. The universal option will be open to all taxpayers, so that those who have individually notified each option to tax to date can convert their individual options into a single universal option.
As a pre-requisite condition of obtaining the universal option, the applicant will be required to provide a current list of all the opted and unopted properties and interests held and the date they were acquired. There will be no requirement to include properties previously held under the option but since disposed of. However, since these properties will still be covered by the original global option, they may need to be included under the universal option at a later date if an interest in that property is ever re-acquired.
The effective date of a universal option will be the date on which written acknowledgment of receipt of the above information is sent. A duly named authorised signatory must sign the request for a universal option. Once accepted, businesses will need to maintain the list of properties by adding new properties, or the appropriate information for subsequent sale or disposals that may occur. There will be no prescribed format for businesses to supply the information.
The new universal option has the following benefits:

• It will be possible to revoke the option on an individual property, subject to the proposed rules, as the acquisition date of each property will be separately identified.
• Taxpayers will no longer need to notify in advance of an option to tax for a transfer of a going concern purchase or a purchase at an auction as currently required, since the universal option will cover every property as it is acquired.
• Rules will be introduced to enable existing global options to be converted to the universal option to ensure that individual properties can continue to be opted without re-starting the 20-year cycle.
• Businesses that have individual options, will be able to convert their current property holdings to a universal option.
• There will be a compliance cost saving for businesses that take up the universal option over individual notifications since much of the information required under the automatic and permission consent condition rules will already be included on the list of property holdings.

New legislation is to be introduced to change the current rules with regard to VAT groups. In essence, where a company is tainted by another's option, that tainting is revoked as soon as the company no longer is connected with the person that opted and does not have an interest in the property. If a relevant associate acquires an interest in the property, it can revoke that option 20 years after it was first treated as a relevant associate in the same way as any other option to tax.
As to opting land and buildings, in future, all new options to tax land will also include any buildings that stand on it at the time or are built on it subsequently. However, if a new building is constructed, at the point of practical completion, or on first occupation (whichever comes first), the taxpayer will be able to revoke the option to tax on the building and the land provided that no supplies have already been made of the new building. Conversely, any new option on a building will apply equally to the land on which it stands. If the building is demolished, the option to tax will remain on the land, but there will again be the opportunity to revoke the option when a new building is constructed. These changes will only apply to new options made after the introduction of the legislation.
HMRC intend to clarify the definition of an 'extension' and that of a 'linked' building, and also the 20-year revocation period runs from the date the original option was exercised.

Wood-fuelled boilers
A 5% reduced rate of VAT applies to the installation of certain specified energy saving materials. From 1 January 2006, this will be extended to include the installation of boilers fuelled solely by wood, straw or similar vegetal matter in homes and certain residential and charity buildings.

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