Options over land and VAT

The FTT has held that the surrender of an option over land is, in principle, an exempt supply: Landlinx Estates Ltd v HMRC [2020] UKFTT 220. The tribunal considered that the surrender of an option was clearly covered by Item 1 of Group 1 Sch 9 VATA 1994.

More generally, the case is important in that HMRC argued, contrary to their long settled and published guidance, that the grant of an option over land (and other lesser rights over land) was not actually covered by the exemption under European law set out in Article 135(1)(j) of the Principal VAT Directive. The tribunal has rejected this argument, but should HMRC appeal the decision and succeed, the restriction of the exemption of land related transactions could, in principle, affect many limited and equitable rights over land.

Background

The case involved the grant of an option to purchase land over which no option to tax had been exercised. Before the option was exercised, the owner of the property paid the option holder £1,425,000 in consideration of the release of the option to purchase land. HMRC considered that this amounted to a taxable supply made by the holder of the option (Landlinx) and not an exempt supply of land.

HMRC’s published guidance, both in VAT Notice 742 and in their Manuals (VATLP20000) confirms HMRC’s view that the grant, assignment or surrender of an interest in, right over or licence to occupy land is normally exempt from VAT. Section 7.4 of Notice 742 confirms that an option to purchase or sell an interest in land amounts to a supply of an interest in land for these purposes.

However, HMRC argued that their guidance was in fact incorrect (and was due to be changed). In particular, HMRC pointed to the 1990 ECJ decision Staatssecretaris van Financien v Shipping and Forwarding Enterprise Safe BV (SFES). According to HMRC, that decision indicated that to fall within Article 135(1)(j) (which exempts “the supply of a building or parts thereof, and the land on which it stands”) the supply must be one of goods. In turn, a supply of goods requires that a transfer of the right to dispose of tangible property as owner, even if there is no transfer of legal ownership of the property. HMRC argued that, whilst the grant of an option under English land law gave rise to an equitable interest in land, it did not confer on Landlinx the right to dispose of tangible property as owner. Therefore, neither was the surrender of the option a supply of land and buildings for the purposes of Article 135(1)(j).

In the alternative, HMRC argued that even if the grant of an option was covered by the exemption, the release of such an option was simply a taxable supply of services.

Decision of the FTT

The FTT has rejected the approach suggested by HMRC – on both of those points.

The FTT accepted that under the clear terms of the UK legislation, item 1 exempted supplies of interests in land and the surrender of an interest in land. As such, the grant and surrender of an option to purchase land would be covered, in principle, by the UK legislation. Of course, it was necessary to construe that legislation in accordance with the VAT Directives. However, on a close analysis of the case law, the FTT rejected the argument that Article 135(1)(j) was limited to supplies of goods and could not cover supplies of interests in land which did not convey on the recipient the right to dispose of the property.

The FTT rejected the argument that the ECJ decision in SFES requires that in order for a transaction to fall within Article 135(1)(j) it must be a supply of goods. A supply of goods was a feature of that case (involving a sale of land which was not completed by a legal transfer), but that did not mean that all supplies of interests in land must amount to a supply of goods for the purposes of Article 135(1)(j). The Court in SFES did not consider whether it was necessary in order to fall within Article 135(1)(j) for the supply to constitute a supply of goods or whether a lesser or derivative interest in land and buildings (such as an option), and which might constitute a supply of services, could also fall within that exemption.

The FTT did note that this question had been considered by the AG in Lubbock Fine, a case concerning the surrender of a lease and which was decided by the ECJ under Article 135(1)(l) (as a transaction related to the leasing of land). The AG had considered that a supply could only fall within Article 135(1)(j) if it amounted to a supply of goods. However, the FTT disagreed with the AG for a number of reasons. In particular, the FTT noted that the AG had simply assumed this point without any analysis. There was, however, no good reason for considering that the reason for exempting supplies of land transactions should not equally apply to supplies of a lesser or derivative interest in land and buildings as it does to the transfer of the whole interest in land and buildings. The FTT also pointed out that if HMRC were correct, then it would lead to the surprising result that there would be a significant difference in the VAT treatment of the purchase of a property where it was bought outright compared to where it was first the subject of an option and that option were then exercised, even where the consideration overall was the same.

In conclusion, the FTT considered that Article 135(1)(j) did not restrict exemption to supplies of goods and therefore Item 1 of Group 1 of Sch 9 could and did apply to equitable interests in land such as an option. Equally, it applied to the surrender of such an option as in this case.

Comment

The capacity of the VAT regime to throw up surprises, even after almost 50 years of application in the UK, is certainly impressive. After such a long period, one would be forgiven for expecting that the question of the VAT treatment of something as straightforward as the grant of an option over land would have been long settled. To say that HMRC’s decision to reconsider the matter and decide that the settled VAT treatment should be revised comes as a surprise is certainly something of an understatement!

Fortunately, the FTT has managed to chart a course through the treacherous waters of the case law of the ECJ and return us to the settled and calm waters of the VAT system that we thought applied all along. Any other decision would have called into question the VAT treatment of not only options but many other lesser rights over land (such as rights of light). As such, the decision of the FTT is to be welcomed and it can only be hoped that HMRC put this aberration behind them.