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As we reported on 2 May 2008, the “Option to Tax” VAT rules for real estate transactions (buildings, land, leases, etc.) changed on 1 June 2008. What was previously known officially as the “Election to Waive Exemption” is now officially known as the “Option to Tax” (as it has always been known to all anyway).

A summary of some of the more major changes is given below.

LAND AND BUILDINGS ARE TREATED AS A SINGLE PIECE OF REAL ESTATE

An Option to Tax will now automatically extend to both the building and the land on which it is built.

So supplies of the land will be subject to 17.5% UK VAT even if the building is demolished.

If a business Opts to Tax some bare land that it owns and then constructs a new building on that land, the building will fall automatically within the same Option to Tax. But in this case, it is possible to exclude the new building from the Option to Tax by writing to HMRC on one of the new forms.

It remains the case, however, that an Option to Tax cannot apply to buildings used for certain purposes, such as dwellings, certain “residential” uses, certain charitable uses, etc.

CANCELLING AN OPTION TO TAX

The “cooling off” period has been extended from 3 months to 6 months after the effective date of the Option to Tax. During this “cooling off” period, a business can effectively change its mind and cancel the Option to Tax notified to HMRC. Of course, there are several conditions which must be satisfied before the revocation can be made.

An Option to Tax a building will not apply if the buyer provides a certificate stating that they (or, if an intermediary, whomever they will sell the building to) intend to use the building for a relevant purpose, such as dwellings, certain “residential” uses, certain charitable uses, etc.

If the business which made the Option to Tax has had no “interest” in the real estate for 6 years, the Option to Tax lapses. So if, after 6 years, that business re-acquires an interest in that same real estate again, it will either make VAT exempt supplies of the real estate, or it will have to make a fresh Option to Tax.

An Option to Tax will be automatically revoked if the business holds no interest in the real estate at the time it makes a “Real Estate Election” (see separate section below).

Otherwise, it is not usually possible for a business to overturn an Option to Tax for 20 years. Even then, several conditions apply, including conditions relating to the Capital Goods Scheme and sales at under market value. Nevertheless, in 2009 it will be possible to revoke the first Options to Tax made in 1989.

REAL ESTATE ELECTIONS (“REE”)

If a business makes Real Estate Election (“REE”), that business will be Opting to Tax every individual piece of real estate in which the business acquires an interest in the future (with effect from the date of acquisition). So the business will not need to notify HMRC of individual Options to Tax in relation to real estate acquired after making a REE.

An REE cannot be revoked. But if the business does not want to Opt to Tax a new piece of real estate, it can revoke the Option to Tax within the 6 months “cooling off” period (see separate section above).

Any real estate on which there is no Option to Tax (and VAT exempt supplies have previously been made) and which is held at the time a business makes an REE will be unaffected by an REE.

CONCLUSION

For any business considering transactions in real estate, whether as buyer or seller, it is best to seek advice as soon as possible so we can help plan for any tax issues involved in the transaction.