The option to tax has been simplified…or has it?

2 June 2008

From 1 June 2008, changes to the option to tax rules, aimed at simplifying and clarifying the existing rules, became effective. Unfortunately, the new Public Notice 742A ‘Opting to tax land and buildings’, is 56 pages long so it could take some time for the ‘layman’ to agree these changes have achieved their objective.

So what has changed? The basic principles have remained fundamentally the same, but certain procedures and applications have changed. First the good news: we have finally lost the confusing, synonymous statement, ‘the election to wave exemption.’ The bad news is that there are several new features that must be understood in order to avoid the risk of significant VAT errors as follows:

• in principle, the option affects land and buildings on the same site but opters can exclude new buildings
• certificates for buildings to be converted to dwellings and land sold to housing associations
• the ability for ‘a relevant intermediary’ to disapply the option to tax
• ceasing to be a relevant associate of an opter
• opters can now change their minds within 6 months, instead of 3
• automatic revocation of the option where no interest has been held for 6 years
• specific rules on revoking an option after 20 years (needed as the first options were made in 1989)
• revised definition of occupation for the anti-avoidance test including a new exclusion for automatic teller machines, and
• the introduction of a new type of option, the ‘real estate election’ or ‘REE’

This forum does not permit a full explanation of the changes, suffice it to say their meaning is far from immediately clear. Furthermore, whereas before the changes, the option was notified to HMRC on Form VAT 1614, there are now 8 new forms (VAT 1614B – 1614J), in essence covering the new certificates, applications, notifications and revocations explained above.

Perhaps ultimately these changes do achieve their desired objectives but several readings of the small print are recommended in order to get there.