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HMRC have unveiled details of a consultation on draft legislation to amend part of the option to tax anti-avoidance test for supplies of land and buildings, contained in VATA 1994, sch 10, paras 12 to 17.
Under the current provision, an option to tax is disapplied where two key tests are satisfied:
- the grantor is a developer of the land; and
- the grantor or development financier intend or expect that the land will become exempt land.
The proposed amendment concerns the second test: the meaning of exempt land. Under para 15, land is exempt if it is to be occupied by the grantor and the occupation is not ‘wholly or substantially wholly for eligible purposes’.
‘Wholly or substantially wholly’ is defined as at least 80%. The mechanistic nature of the anti-avoidance test has resulted in concerns about the effect of the measure on certain transactions.
Following representations to the taxman, the test was amended from 1 April 2010 and a new 10% occupation test was introduced. HMRC have been made aware of instances in which minor occupation by the grantor can cause an option to be disapplied where there was no deliberate attempt to avoid tax.
The proposed change introduces a further 2% occupation rule applicable where the grantor or someone connected to the grantor is to be in occupation. This is in addition to the existing 10% rule.
Under the proposed change, a grantor is not treated as in occupation where the conditions of the 2% occupation rule are met (the conditions largely mirror those of the existing 10% rule). The rule works as follows:
- There must be no intention or expectation at the time of the grant that the grantor or a person connected with the grantor will occupy more than 2% of any building (or part of a building) included in the grant.
- The proportion of the building occupied is to be calculated in relation to the whole of the single building or, where the grantor holds an interest in only part of the building, that part in which an interest is held immediately prior to the grant being made.
- Where a number of buildings are included in the same grant, the rule is applied to each building on an individual basis. Where the 2% threshold is exceeded in relation to any of the buildings, the conditions of the rule are not met.
- The rule is not satisfied where the person(s) occupy any land included in the grant that is not a building.
The way that occupation by reference to automatic teller machines (ATMs) is treated will also be changed. In future, occupation of land that is solely by reference to ATMs will not be treated as occupation for the purposes of the anti-avoidance test and will also be ignored for the purposes of both the 2% and 10% rules.
The aim of the changes is to simplify the anti-avoidance test. The amendments to para 15 should ensure that the option to tax is not disapplied where a grantor occupies very minor parts of buildings and should, as a result, help to facilitate business.
Comments on the draft legislation should be emailed via the link in Revenue and Customs Brief 50/10 no later than 3 January 2011.
