HMRC was proposing to change its official policy towards the treatment of options to buy property, treating these payments as standard-rated in all cases. The First-tier Tribunal’s recent decision in Landlinx has confirmed that the existing published policy is correct. Options to acquire land should be treated in the same way as the land acquisition itself, so will be exempt from VAT in most cases.
The value of land can change dramatically overnight as a result of decisions such as whether it can be used for residential development; whether a new road, train station or school will be built nearby; or whether a major business will relocate to the area. Such decisions can take years to confirm, so potential buyers will often seek to take an option to buy the land for a certain price once this certainty has been achieved.
HMRC has historically seen these call options as being the supply of an interest in land and this is set-out in its published guidance. The consequence of this is that the VAT treatment is the same as if you sold the land. Unless specific provisions apply that make this taxable, or the landowner has opted to tax, the payment made for the call option will be exempt from VAT.
In recent meetings with industry representatives, HMRC had indicated that it had changed its view, although no formal changes to guidance have yet been made. This change of approach was outlined by HMRC’s counsel in the recent case of Landlinx.
Landlinx had acquired an option to acquire a horticultural nursery site once planning had been granted. It agreed to relinquish this option for a payment of £1,425,000 which it treated as being exempt from VAT. HMRC assessed for VAT of £237,500.
HMRC conceded that under English land law, Landlinx had acquired an interest in the land. However, it argued that it had not acquired the right to dispose of the property as owner, and so the grant of the option was not a supply of land for VAT purposes. If it was not a supply of land, it did not fall to be VAT-free for any other reason, so must be subject to VAT.
Secondly, HMRC argued that even if it was wrong on the first point, and the grant of an option is exempt from VAT, it does not follow that a payment to release such an option is exempt. The landowner did not acquire any new right in the land as a result of this action.
The tribunal disagreed. A landowner does make a supply of an interest in their property when they grant a call option. This is exempt, subject to the option to tax. Following previous case law on lease surrenders, the tribunal also held that if granting an option is an exempt supply of land, releasing one must also be exempt, subject to the option to tax.
The tribunal noted that HMRC’s analysis would lead to very different tax treatments between someone buying a property for £1 million and someone paying £100,000 for the right to buy it for £900,000. It felt that this could not have been the intention of legislation.
Over the past few months those seeking to negotiate call options have had to deal with the difficult situation of HMRC’s actual policy on call options being at odds to its published policy, a fact that not all advisers, or indeed HMRC officers, have been aware of.
The decision provides welcome confirmation of the established position on call options for property sales. A note of caution is that judgments of the First-tier Tribunal do not create legal precedent binding on other parties. It is to be hoped though that this decision will be accepted by HMRC so that such transactions can go ahead with both sides confident that the VAT treatment will not subsequently be challenged.
If you have charged, or been charged, VAT on a call option, and are now uncertain whether this was correct, please contact Adam Cutler or your usual VAT contact.
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