Option To Tax: New Rules

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25 June 2008

"The option to tax rules have been amended with effect from 1 June 2008 and significant changes include: extension of the option to include new buildings built on land, new periods in which an option may be revoked, and a new certification process where a purchaser intends to convert a building into a residential property."

With effect from 1 June 2008, the old Schedule 10 VAT Act 1994 has been replaced by a new Schedule which is intended both to set out the old rules clearly and to make various changes.  HMRC have also published a new Notice 742a to replace the 2002 version, some of which has the force of law.

The main changes to note are as follows:

Extent of the option

An option over land no longer lapses if a building on that land is demolished.  Also, an option will still apply to any new building constructed on that land, unless an election is made for the option to be disapplied.  These rules apply to most existing options, however, if it is clear that a pre-1 June option only covers a building (and not the surrounding land) then if that building is demolished, the option may be treated as lapsed. 

A new "Real Estate Election" (REE) has been introduced which automatically opts any property which the taxpayer subsequently acquires.  The option takes effect in respect of each property from the date of its acquisition (which then gives time to revoke the election under the new cooling off period – see below).

Options to tax over property in which the taxpayer has a relevant interest are not affected by the making of the REE.  On the other hand, options to tax over property where the tax payer no longer has a  relevant interest will be revoked when an REE is made.  Any property in respect of which the taxpayer has not opted but has made exempt supplies thereof will be unaffected by the REE (permission to opt will be required).


The "cooling off period" of 3 months from which the taxpayer can revoke an option has been increased to 6 months and HMRC's consent is not usually required. 

An option can also be revoked after 20 years. 

Options will automatically lapse once the taxpayer has not held interest in the relevant land for 6 years. 

Relevant associates

The VAT group rules have been amended so that a company which leaves a VAT group and which no longer has an interest in the land will no longer be bound by an option to tax made by the group in respect of that land.  There are also other limited circumstances in which the option may cease to apply to a relevant associate if certain conditions are met (or if HMRC grant permission).

Dwellings and conversion

Buildings which are dwellings or "relevant residential properties" are still not affected by any option to tax.

The rules relating to the intention of a purchaser to convert a building into a dwelling or relevant residential property have changed such that, in order for the option to be disapplied, the purchaser must now provide the seller with a certificate that it intends to convert the building before the price for the grant of the interest by the seller is "legally fixed" (or later if the seller agrees). 

The certification process can apply to a chain of purchasers such that a second purchaser can certify to a first purchaser that it intends to use the building as a dwelling, who then in turn certifies his intention to the seller.

This betters the position of the seller who will no longer be subject to a last minute notification of the purchaser's intention to convert a building (which meant the seller would then make a potentially detrimental exempt supply). Purchasers will need to certify as early as possible (preferably before heads of terms are signed) in order to avoid having to obtain the seller's agreement that a certificate can be given.

Permission to opt

Permission to opt is no longer required if any exempt supplies were made more than 10 years earlier.  In addition, the option can take effect from the date permission is sought (rather than after permission is granted) and no separate notification of the option is required once permission has been granted. 


The rules have been changed such that financial institutions which have an ATM located on a site are no longer regarded as occupying the building for these purposes.

Occupation "substantively wholly" for eligible purposes is now statutorily defined as 80% taxable activities. 

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