This Order, which comes into force on 1st June 2008, substitutes a new Schedule 10 to the Value Added Tax Act 1994 (c. 23) (“the Act”) for the purpose of rewriting the Schedule, with amendments, into language that is clearer and easier to use. It includes further provisions, such as granting taxpayers new appeal rights relating to Schedule 10 to the Act (“Schedule 10”), consequential amendments, repeals and revocations and transitional provisions and savings.

Article 1 provides for the citation, commencement and effect of this Order. Subject to the transitional savings and provisions in Schedule 2 to the Order, it has effect (apart from Article 4) in relation to supplies made on or after 1st June 2008. Article 4 has effect (subject to Schedule 2) in relation to supplies made on or after 1st June 2020.

Article 2 substitutes Schedule 10.

The rewritten Schedule 10 which is substituted by article 2 of this Order is divided into three Parts.

Part 1 of Schedule 10 (which comprises paragraphs 1 to 34 of the Schedule) makes provision for a person to opt to tax any land. Subject to certain exceptions, supplies of land made in the course or furtherance of a business are exempt from Value Added Tax (“VAT”) by virtue of Group 1 of Schedule 9 to the Act. A business may claim credit in respect of the VAT it pays on the goods and services supplied to it (“input tax”) if the goods and services are used by the business to make taxable supplies. This will either reduce the amount payable by it to Her Majesty’s Revenue and Customs in respect of a VAT accounting period or give rise to a repayment if the input tax is greater than the VAT charged on taxable supplies made by the business during the VAT accounting period. Generally, a business cannot claim credit for input tax charged on goods and services which are used to make the VAT exempt supplies.

The high cost of many supplies relating to land and buildings means that the benefit to a business of not being required to charge VAT on supplies such as the leasing of land or buildings by virtue of the VAT exemption can be outweighed by the cost of being unable to claim credit in respect of the input tax paid on supplies made to the business which it uses to make VAT exempt supplies. By allowing a business to opt to tax (subject to certain exceptions) the supplies it makes in relation to land or a building, this disadvantage may be removed. Although this means that VAT has to be charged to the person to whom the land or building is supplied, if that person is also a business making taxable supplies, that person may be able to claim credit for the VAT charged on the supply.

Paragraph 1 provides an overview of the main provisions relating to the option to tax which enables a business to charge VAT on its supplies of land that would otherwise be exempt from VAT.

Paragraph 2 provides that if a person (“the opter”) exercises an option to tax any land in accordance with Part 1, a grant of that land made by the opter (or by a relevant associate of the opter) will not be treated as a VAT exempt supply if it is made at a time when the option to tax has effect.

Paragraphs 3 and 4 provide for the circumstances in which a body corporate is a relevant associate of an opter and the circumstances in which such a body ceases to be a relevant associate of an opter.

Paragraph 5 provides that an option to tax has no effect in relation to a grant of a building (or part of a building) which has been designed or has already been adapted for use and which is intended to be used as, a dwelling (or number of dwellings) or, where certification requirements are met, solely for a relevant residential purpose.

Paragraph 6 provides that an option to tax has no effect in relation to a grant of a building (or part of a building) to a person who certifies that it is intended for use as a dwelling (or number of dwellings) or solely for a relevant residential purpose. The circumstances in which a person may certify the required intention are contained in the paragraph but are subject to the power of the Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) to publish a notice specifying the form in which such a certificate is to be made (and the information to be contained in it) and preventing a person from giving a certificate unless specified conditions are met.

Paragraphs 7, 8 and 9 provide that an option to tax has no effect in relation to a grant of a building (or part of a building) intended for use solely for a relevant charitable purpose (but not as an office), or as a pitch for a residential caravan or facilities for the mooring of a residential houseboat which may be used as a residence throughout the year.

Paragraph 10 provides that an option to tax has no effect in relation to a grant to a relevant housing association which certifies that the land will be used for the construction of a building or buildings intended for use as a dwelling (or dwellings), or solely for a relevant residential purpose.

Paragraph 11 provides that an option to tax has no effect in relation to a grant to an individual if the land is to be used for the construction of a building for use by the individual as a dwelling provided the construction is not carried out in the course or furtherance of a business carried on by the individual.

Paragraph 12 provides that a supply arising from a grant made by a person who was a developer of the land concerned will not be a taxable supply as a result of an option to tax if that person, or a person who is a development financier, intended or expected that the land would become, or continue to be, exempt land.

Paragraph 13 describes the circumstances in which a grant in relation to any land is made by a developer of the land.

Paragraph 14 explains the circumstances in which a person is a development financier.

Paragraphs 15 and 16 explain the meaning of exempt land.

Paragraph 17 makes special provision regarding the application of paragraph 12 to a grant in relation to land made on or after 19th March 1997 and before 10th March 1999.

Paragraph 18 specifies the extent to which an option applies to land, a building or part of a building which is (or is to be) constructed on the land and the circumstances in which more than one building or complexes consisting of a number of units are treated as a single building. The paragraph also provides that a building includes a planned building and any enlargement, extension or annex to a building.

Paragraph 19 provides for the time from which an option to tax has effect.

Paragraph 20 provides that an option only has effect if notified to the Commissioners within 30 days from when it was exercised, or such longer period allowed by the Commissioners, together with such information as they require.

Paragraph 21 provides that if a person makes a real estate election and notifies it to the Commissioners in accordance with that paragraph in the form specified in a public notice, then, subject to certain exceptions, the subsequent acquisition of a relevant interest in land or a building by that person (or a body corporate treated under sections 43A to 43D of the Act as a member of the same group as that person (“relevant group member”)) will cause the person who made the real estate election to be treated as opting to tax the land or building concerned. A person who makes a real estate election may not revoke it but the Commissioners may do so if that person does not comply with a requirement to give to the Commissioners information specified in a public notice in the time allowed.

Paragraph 22 provides that a real estate election revokes (in whole or part) an earlier option to tax made by the person making that election or a relevant group member if they or another relevant group member have no relevant interest in the land or building concerned when the real estate election is made. An option to tax that was exercised in relation to land otherwise than by reference to a building or part of a building that is not revoked may be converted by the person making the real estate election into separate options to tax different parcels of that land. The separate options must be identified in the notification of the real estate election pursuant to paragraph 21 and are treated, for the purposes of Part 1 apart from paragraph 3(2), as having been made by the person making the real estate election with effect from the time when the original option had effect. For the purposes of determining whether, by virtue of paragraph 3(2), a body corporate is a relevant associate of the person who, by virtue of the real estate election, converts an option into an option treated as made by that person, the option is treated as having effect when the real estate election is made.

Paragraph 23 provides that an option to tax may be revoked by an opter within 6 months from the day on which it had effect provided certain conditions are met.

Paragraph 24 provides where an opter has held no interest in, right over or licence to occupy a building or land for a continuous period of 6 years beginning at any time after the option has effect, the option will be revoked from the end of that period.

Paragraph 25 provides for an option to be revoked after it has had effect for more than 20 years providing conditions specified in a public notice are met and notification of the revocation of the option is given to the Commissioners. Where the conditions specified in a public notice are not met, an option that has had effect for more than 20 years may, if the prior permission of the Commissioners is obtained (and subject to any conditions imposed by them), be revoked with effect from the day when their permission is given or, where they have power to do so, an earlier day specified by the Commissioners.

Paragraph 26 provides that, in the circumstances described in that paragraph, an option will not be revoked in accordance with paragraphs 22(2) and (3) (real estate elections) and 24 (revocation of option after a lapse of 6 years since having a relevant interest).

Paragraph 27 specifies the circumstances in which a new building and all the land within its curtilage may be excluded from the effect of an option.

Paragraph 28 provides that where a VAT exempt supply of land occurs in the 10 years preceding an option to tax having effect in respect of that land, an option to tax may only be made if conditions specified in a public notice are met or the prior permission of the Commissioners is obtained. The Commissioners must refuse their permission if they are not satisfied that there would be a fair and reasonable attribution of relevant input tax to relevant supplies.

Paragraph 29 provides that an application for prior permission under paragraph 28 must be made in a specified form and that the Commissioners may specify conditions subject to which their permission is given which, if broken, would allow them to treat the application as if it had not been made. Where permission is given, the option to tax has effect from the start of the day on which the application for permission was made or any later day specified in the application.

Paragraph 30 provides that the Commissioners may dispense with the requirement for their prior permission to be given under paragraph 28 so that an option to tax purportedly exercised and notified in circumstances where their prior permission should have been obtained may be treated as if it had been validly exercised.

Paragraph 31 provides that if an option to tax is exercised after the time of a grant relating to land, any supplies arising from that grant, which are made after the option takes effect, are nevertheless treated as taxable supplies.

Paragraphs 32 and 33 provide that certain Notes to Group 5 of Schedule 8 and Group 1 of Schedule 9 to the Act apply for the purposes of Part 1 of Schedule 10.

Paragraph 34 provides other definitions for the interpretation of Schedule 10.

Part 2 of Schedule 10 (which comprises paragraphs 35 to 39 of the Schedule) rewrites the former paragraph 1 of Schedule 10 as amended by S.I. 2002/1102. It provides that a taxable supply will be made by a person who has received a relevant zero-rated supply in relation to certain buildings which are no longer used or intended for use for relevant charitable or relevant residential purposes.

Paragraph 35 defines the meaning of relevant zero-rated supply.

Paragraph 36 provides that a person granting an interest in, right over or licence to occupy a building or part of a building will, where conditions A and B of that paragraph are met, be treated as making a taxable supply in the course or furtherance of a business in so far as the grant is in respect of a building (or part of the building) to which a relevant zero-rated supply related if the building (or the relevant part of it) is not intended for use solely for relevant residential or relevant charitable purposes after the grant.

Paragraph 37 provides that a person will be treated as making a supply for a value determined by that paragraph if a zero-rated supply relating to a building (or part of a building) has been made to that person and, within 10 years of the building’s completion, that person uses it (or the part of it to which the zero-rated supply related) for a purpose which is neither a relevant residential purpose nor a relevant charitable purpose.

Paragraphs 38 and 39 provide that certain Notes to Group 5 of Schedule 8 and Group 1 of Schedule 9 to the Act apply for the purposes of Part 2 of Schedule 10.

Part 3 of Schedule 10 (which comprises paragraph 40 of the Schedule) rewrites the former paragraph 8 of Schedule 10. Section 26(2) of the Finance Act 1995 (c. 4) made provision for paragraph 8 to become sub-paragraph (1) of that paragraph and for sub-paragraphs (2) and (3) to be inserted into paragraph 8. Section 26(3) of that Act provided that section 26 should be brought into force on such day as the Commissioners may by order made by statutory instrument appoint. The Commissioners have made no order to bring section 26 of the Finance Act 1995 into force. The amendments that would have become sub-paragraphs (2) and (3) of paragraph 8 of the former Schedule 10 if section 26 had been brought into force have not been rewritten.

Paragraph 40 provides that where the consideration for a grant of an interest in, right over or licence to occupy land accrues to a person (“the beneficiary”) other than the person making the grant, that beneficiary is treated as making the grant and input tax of the person actually making the grant which is attributable to it is treated as input tax of the beneficiary.

Article 3 amends Part 5 of the Act (appeals). Article 3(2) inserts section 83(wb) into the Act so that any refusal of the Commissioners to grant any permission under, or otherwise to exercise in favour of a particular person any power conferred by any provision of Part 1 of Schedule 10, may be appealed to the VAT and duties tribunals. Article 3(3) inserts section 84(7ZA) into the Act so that the tribunal shall not allow such an appeal unless it considers that the Commissioners could not reasonably have been satisfied that there were grounds for the refusal and that the refusal has effect pending determination of the appeal.

Article 4 repeals paragraph (b) of item 1 and Note (7) in Group 1 of Schedule 9 to the Act (developmental tenancy, developmental lease or developmental licence).

Article 5 repeals section 26 of the Finance Act 1995 (c. 4) (co-owners etc of buildings and land) which was not brought into force with consequential repeals of section 51A of, and paragraph 8(2) and (3) of Schedule 10 to, the Act.

Article 6 and Schedule 1 make consequential amendments to Acts of Parliament and subordinate legislation arising from the rewriting of Schedule 10. Part 1 of Schedule 1 amends the Act, the Finance Act 1997 (c.16) and the Finance Act 2003 (c. 14). Part 2 of Schedule 1 makes amendments and revocations in respect of certain Orders and Regulations made under the Act.

Article 7 and Schedule 2 make general provision for the continuity of the law in connection with the rewriting of Schedule 10 and other provision in respect of actions undertaken before 1st June 2008.

Part 1 of Schedule 2 makes provision having effect instead of section 17(2) of the Interpretation Act 1978 (c. 30) by providing that the re-enactment of any provision of Schedule 10 does not affect the continuity of the law (except where there is a change in the law relating to that provision). Anything done or having effect as if done under a superseded provision of Schedule 10 which is in force or effective immediately before commencement of the corresponding rewritten provision has effect afterwards as if done under or for the purposes of the rewritten provision. So far as the context permits, references in any enactment, instrument or document to a rewritten provision or a superseded provision (or things done or falling to done under or for the purposes of such a provision) must, in relation to times or circumstances falling before or after the re-enactment of Schedule 10, be read as references to the corresponding superseded or rewritten provision as appropriate.

Part 2 of Schedule 2 provides that elections made before 1st November 1989 continue to have effect from the beginning of 1st August 1989 (or of any later day specified in the election) and that any election made before 1st March 1995 and having effect before that day continues to have effect notwithstanding that it has not been notified to the Commissioners. It also provides that the fact that paragraphs 5 to 7 of Schedule 10 as it stood before being rewritten are not rewritten does not affect the continued operation Part 15 of the Value Added Tax Regulations 1995 (S.I. 1995/2518) (adjustment to input tax deduction on capital items relating to supplies made on or before 1st March 1997) or the continued operation of paragraph (b) of item 1 and Note (7) in Group 1 of Schedule 9 to the Act in relation to supplies made before 1st June 2020. Additionally, the fact that the words “, or of a description specified” in paragraph 3(2) of Schedule 10 as it stood before rewriting are not rewritten does not affect the continued operation of an option to tax made before 1st June 2008 which specified a description of land.

A full and final Impact Assessment has not been produced for this instrument as a negligible impact on the private or voluntary sectors is foreseen.