The release of an option over land is an exempt supply
The grant, assignment or surrender of an interest in, right over or licence to occupy land is usually exempt from VAT – and HMRC’s published practice has, for many decades, been to treat the grant of an option to acquire land as an exempt supply. But it has revisited its thinking recently and has suggested that the grant of an option over land is, in fact, a standard rated supply of services – as opposed to an exempt supply of land. It has also suggested that the release of an option to acquire land is not the “mirror image” of the grant of an option to purchase land. Therefore, even if the grant of an option were to be an exempt supply, the release of an option for consideration is not.
Hence the litigation in Landlinx Estates Ltd v HMRC [2020] UKFTT 220. Landlinx was granted an option to purchase land over which the option to tax had not been exercised – and, instead of completing the purchase, Landlinx agreed to release the option in return for a payment of £1,425,000. Was the release a taxable supply for the purposes of VAT? If so, Landlinx would have to account to HMRC for VAT in the sum of £237,500, even though HMRC’s published practice had not given it any reason to suppose that this would be the case.
Article 135(1)(j) of the VAT Directive that applies exempts “the supply of a building or parts thereof, and the land on which it stands” from VAT. Does a lesser or derivative interest in land and buildings – such as an option – fall within the exemption?
The grant, assignment or surrender of an interest in, right over or licence to occupy land is usually exempt from VAT – and HMRC’s published practice has, for many decades, been to treat the grant of an option to acquire land as an exempt supply. But it has revisited its thinking recently and has suggested that the grant of an option over land is, in fact, a standard rated supply of services – as opposed to an exempt supply of land. It has also suggested that the release of an option to acquire land is not the “mirror image” of the grant of an option to purchase land. Therefore, even if the grant of an option were to be an exempt supply, the release of an option for consideration is not.
Hence the litigation in Landlinx Estates Ltd v HMRC [2020] UKFTT 220. Landlinx was granted an option to purchase land over which the option to tax had not been exercised – and, instead of completing the purchase, Landlinx agreed to release the option in return for a payment of £1,425,000. Was the release a taxable supply for the purposes of VAT? If so, Landlinx would have to account to HMRC for VAT in the sum of £237,500, even though HMRC’s published practice had not given it any reason to suppose that this would be the case.
Article 135(1)(j) of the VAT Directive that applies exempts “the supply of a building or parts thereof, and the land on which it stands” from VAT. Does a lesser or derivative interest in land and buildings – such as an option – fall within the exemption?
HMRC argued that an option to purchase land does not transfer ownership of the land. It enables the option holder to become the owner when it exercises the option. So, until the option was exercised, Landlinx did not become the beneficial owner of the property and, when it surrendered its rights under the option agreement, it was not surrendering or transferring ownership of the underlying property. Consequently, it was not making an exempt supply of land.
The First-tier Tribunal considered that it would be contradictory if the sale of land were to be exempt from VAT, but the grant of an option were to be treated differently. It would mean that, if the seller were to grant a call option, the consideration paid for the option would be subject to VAT, while the remainder of the purchase price, paid on completion of the transaction, would be exempt. In other words, “one-step” and “two-step” purchases – two economically equivalent transactions – would be taxed differently, even if the total amount paid for the land is exactly the same.
The tribunal decided that Article 135(1)(j) applies to supplies of a transferor’s interest in land and buildings – and to supplies of lesser or derivative interests in them as well. In English law, the grant of an option creates an equitable interest in land that can be protected by the registration of a notice or land charge, creating a property right that binds third parties. Furthermore, in Lubbock Fine & Co v CCE [1993] EGCS 219 the surrender of a lease was entitled to the same exemption as its grant. This indicated that the grant and release of an option over land should receive the same treatment. Therefore, the release of the option was an exempt supply for the purposes of VAT.
Allyson Colby, property law consultant
