VAT treatment of options to purchase land

23rd June 2020

On 15 May the First-tier Tax Tribunal released its judgement in the case of Landlinx Estates Ltd (Landlinx). The case is significant, not because of the result, but because HMRC took the case in the first place.

It has long been the position that the grant of an option to acquire land (a call option) is itself the grant of an interest in land, and therefore usually exempt from VAT unless the grantor has opted to tax the land. The same treatment applies to put options and surrenders of options.

Similarly, if the interest in land would fall outside the exemption, such that it was standard-rated, then an option to acquire such an interest would also be standard-rated.

Landlinx had an option to acquire Loxwood Nurseries in West Sussex. In late 2016 it agreed to surrender its option for circa £1.4m. No VAT was accounted for on the consideration for the surrender as Landlinx had not opted to tax the land in question. This treatment was in accordance with HMRC’s published practice, however, HMRC issued an assessment for VAT on the payment.

HMRC, on reviewing the decision to assess, stated that whilst they accepted that the grant of a call option was an interest in land, the surrender of such an option did not provide the landowner with any right in the land and was therefore a standard-rated supply.

Subsequently, at the tribunal hearing HMRC stated that they had now changed their interpretation of the law and that the granting of a call option as well as its surrender are no longer interests in land.

The reason for this change in their long held view was that whilst they accepted that an Option Agreement created an interest in land for domestic English land law provisions, it was not sufficient to constitute a supply of goods which was what was exempted in EU law.

The tribunal disagreed with HMRC, that only a supply of goods were exempt in EU law and held that services were also capable of falling within the relevant EU exemption for supplies of land and property. As a result, Landlinx won its case.

The question now is why, after 46 years did HMRC seek to change their view of the law and will they seek to appeal the decision? If they do and are successful that could have significant implications for the property sector.

Phil Salmon

Partner, Co-Head of VAT
+44 20 7969 5611
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