Blogs are normally for talking about stuff and not technical information. But ever since I set up www.vatexchange.co.uk, I keep blogging about how important it is to plan ahead for VAT with any property transactions and sometimes I think it’s a useful way of reminding people about technical stuff in a less formal setting.

As the option to tax was introduced in 1989, it is now possible to revoke those first options under the 20 year rule, which enables property owners to revoke the option any time after the option has been in place for 20 years or longer.

Quite straightforward, you might assume. Unfortunately the development of anti-avoidance legislation in the past 20 years has made revoking options a lot more complicated and means that in some circumstances, you will need to obtain permission from HMRC to revoke the option. And it’s normally too late to change the VAT liability once anyone has signed head of terms or otherwise agreed the price in writing, never mind exchanging contracts or completing deals.

Complicated and Expensive!

It might seem like a good idea to revoke an option to tax so that you can sell it exempt from VAT, but changing the liabilty of the property may also mean that you have to repay some of the input tax claimed on related costs in previous years. So you really need to consider the issue well in advance as revoking an option could cost more than you’d bargained for.

I wouldn’t normally include technical detail about any VAT subject in a blog but I have made an exception with this blog for a good reason – to emphasise the fact that revoking options to tax, like any other aspect of the subject, is complex and must be thought through in advance.

Anyone who has taken the time to look at the revised version of VAT Notice 742A: Opting to Tax Land and Buildings will be aware that there is a whole section (Section 8; pp 31 – 39) setting out the rules for revoking options.

Now for the technical bit…..

There are 3 situations when options can be revoked:

• Revoking an option within the 6 month “cooling off” period
• Automatic revokation of an option where no interest has been held for more than 6 years
• Revoking an option where more than 20 years have elapsed since it first had effect

The 20 year revokation only applies when certain conditions are met:

• The relevant interest condition
• The 20 year condition
• The capital item condition
• The valuation condition
• The pre-payment condition

These conditions are described in some detail in the Notice, then followed by another 2 pages of explanatory notes. The reason that they exist is to ensure that property owners don’t obtain a VAT advantage by revoking the option. Each of them reflects different aspects of the anti-avoidance legislation that has been introduced in the 20 year history of the option to tax.

The reason I’ve included this list here is to emphasise that you need to have a lot of detailed facts about the property and the VAT profile of its’ owners and other related parties before you can revoke an option. And if you don’t satisfy these conditions, then you need to request permission to revoke the option from HMRC in advance. In either case, you need to notify HMRC before revoking the option.

20 Years Worth of Information

What does it actually mean in practice?

To establish whether or not you satisfy the conditions to revoke an option on a particular property, you need a lot of information about the property. This can include the original costs of construction, any renovations, extentions, refurbishments carried out during the 20 years concerned. You may need to know how much VAT was claimed on such costs by each owner during that time or other person with an interest in the property. You may also need to know details of the VAT group registrations of any parties who have had an interest in the building – even if just a tenant. You might also need to know who has financed the construction of the property or other work carried out on teh property and details of their VAT group registrations.

This is a lot of detailed information and it can take a lot of time to pull all of this information together from scratch.

Keeping Property Files

When the option to tax was first introduced in 1989, we advised clients to set up a VAT Option to Tax file to retain information about opted property. Nowadays you probably need to take a much more sophisticated approach and keep a separate file for each property. Perhaps each property could be accompanied by an individual VAT Profile – a VAT passport if you like – that is passed from one owner to the next during the life of the property. I’m sure most property owners pass on certain information anyway but the possibility of revoking options makes it even more important.

Of course I know that this could be difficult in the real world as such information is probably commercially sensitive, but unfortunately tax legislation isn’t particularly bothered about such practical or commercial issues. Most property contracts I see nowadays already provide for the vendor to provide certain VAT information to the purchaser and this is really just taking it one step further.

Either way, if you or your clients are considering revoking options under the 20 year rule, just be aware that certain conditions need to be fulfilled and that you need to notify HMRC before revoking the option.

Marie