Revoking the Option to Tax after 20 years

Options to tax can be revoked in three ways:

  • if taxpayers change their minds within six months of the effective date of their options to tax (subject to certain conditions);
  • where taxpayers have not held an interest in the opted building or land for a continuous period of six years commencing at any time after the option to tax has effect; or
  • where 20 years have elapsed since the option first had effect.

Generally, new options to tax were created when local government was re-organised; as 20 years has elapsed, or is about to elapse, since a number of such re-organisations, the application of the ’20 year rule’ is something to consider.

Reorganisations that might be affected include:

  • In 1995 the two Isle of Wight districts were merged and the county became a unitary.
  • In Wales in 1996, twenty-two new unitary authorities were created, known as ‘counties’ or ‘county boroughs’.
  • Also in 1996 the counties of Avon, Cleveland and Humberside were abolished and divided into unitaries, and the city of York became a unitary after separating from North Yorkshire County Council.

The authorities affected by these changes can revoke their options to tax under the “20-year” rule, should they want to.  How is this done?

In certain circumstances, it is possible to revoke an option without HMRC permission.  This is where the so-called Condition 1 is met, or Conditions 2-5 are met

Condition 1 – the relevant interest condition

Where neither your authority nor any relevant associate connected with it has a relevant interest in the building or land at the time when the option is revoked, and

if your authority or a relevant associate of it has disposed of such an interest, no supply for the purpose of the charge to VAT in respect of the disposal –

  1. is yet to take place, or
  2. would be yet to take place if one or more conditions (such as the happening of an event or the doing of an act) were to be met.

What does that mean in plain English?  For local authorities, if twenty years have passed since a property was opted and your authority no longer has any interest in the property, you can notify HMRC that the option to tax is revoked. (Relevant associate here means bodies in a VAT group that are bound by another body’s option to tax).

Revoking the Option to Tax Conditions 2 – 5 are set out below.

Condition 2 – the 20-year condition

Where your authority or a relevant associate connected with it held a relevant interest in the building or land after the time from which the option had effect, and more than 20 years before the option is revoked.

Condition 3 – the capital item condition

Any land or building that is subject to the option at the time when it is revoked does not fall, in relation to your authority or a relevant associate connected with it, for input tax adjustment as a capital item under part 15 of the Value Added Tax Regulations 1995 (adjustments to the deduction of input tax on capital items).

Condition 4 – the valuation condition

Neither your authority nor any relevant associate connected to it has made a supply of a relevant interest in the building or land subject to the option in the 10 years immediately before revocation of the option that:

  • was for a consideration that was less than the open market value of that supply, or
  • arose from a relevant grant.

Condition 5 – the pre-payment condition

No part of a supply of goods or services made for consideration to your authority or a relevant associate connected with it before the option is revoked will be attributable to a supply or other use of the land or buildings by your authority more than 12 months after the option is revoked.

Again, you do not need permission to revoke an option to tax where:

  • 20 years have passed since the option to tax was made;
  • no adjustments are necessary under the capital goods scheme (or any outstanding adjustments involve less than £10,000 VAT);
  • no prepayment of expenses has been made that will apply for longer than a 12-month period after the option is revoked; and
  • no rental charges at less than market value have been made in the past ten years.

If any of the five conditions cannot be met, HMRC’s permission will be needed to revoke the option to tax.

Permission would normally be granted if HMRC considers no VAT benefit for a taxpayer or another party by careful timing of the revocation; in other words, input tax recovery just before the revocation must be fair and reasonable.

To effect the revocation, you must notify HMRC on form VAT 1614J, reproduced below.

Download the relevant form from HMRC

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Nick Burrows

Written by Nick Burrows

Nick has nearly 30 years of working with and supporting public sector bodies with VAT and indirect taxes, starting at HM Customs and Excise and then as in-house VAT Officer at Hampshire County Council. Since moving to advisory firms, Nick has had senior public sector VAT roles at RSM Tenon (now RSM), KPMG, and PSTAX (since 2014). He has led VAT advice nationally on a wide range of public sector issues and helped shape HMRC policy in several key areas.

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