Occasionally (but far too frequently for comfort) one wonders, as a tax practitioner, if one has somehow wandered into a parallel universe where ‘nothing that is so is so’.
Feste’s phrase from Twelfth Night springs to mind on reading the recent case of Landlinx Estates Ltd v HMRC [2020] UKFTT 220 (TC).
Landlinx held a call option entitling it to acquire some land. The owner of the land (the grantor of the option) paid Landlinx some £1.5m to give up its option rights. The ‘option to tax’ had not been exercised in respect of the land, and it was not in dispute that a sale of the land would have been exempt from VAT.
Landlinx did not account for VAT on the money it received. On the face of it, this was not an unreasonable view to take, given that that appeared to accord with HMRC’s published practice, both in its internal guidance manuals and in the VAT Notice 742. The one reads ‘The grant of an option is an exempt supply if the purchase of the property would itself be exempt, if it were made at that time’; the other that ‘The liability of your supply [sc, the grant of an option] will be whatever the liability of the land or building would be if supplied at that time’. Pretty plainly, if the grant of a call option is exempt from VAT as being the supply of an ‘an interest in land’ then so too must the surrender of one.
Aha, said HMRC. That may be what we say in our published materials, and what has been our practice since 1972; but we have now reconsidered our position and we are planning to revise our practice. HMRC asserted at the Tribunal that ‘the grant of an option to acquire land is a standard rated supply of services rather than an exempt supply of land. Furthermore, HMRC considers that the release of an option to acquire land is not the “mirror image” of the grant of such an option so that, even if the grant of an option were to be an exempt supply, the release of that option for a consideration would not likewise be exempt.’
What was even more bizarre was that this was not only in direct contradiction to HMRC’s guidance and historic practice: it was also different from the view HMRC had espoused in their internal review letter, wherein they had agreed that the grant of a call option was an interest in land and was therefore an exempt supply (albeit that the surrender of that interest was not).
Examining both EU law and the UK law, the Tribunal concluded that a call option was indeed an interest in land and that its supply or surrender was exempt from VAT: HMRC’s published guidance and long-established practice was indeed correct.
The Tribunal made two particularly piquant observations. First HMRC’s analysis would have the result that a sale of land would have no VAT cost whereas the ‘economically equivalent’ transaction of the purchase and subsequent exercise of a call option would: ‘This would be a strange result, which of itself suggests that it cannot be right.’ Second, since Landlinx had had (based on HMRC’s published practice) no reason to require in the contractual documentation that the consideration paid to it should be VAT exclusive, ‘a very real unfairness would have been visited on Landlinx’ if the Tribunal had decided that VAT was due.
We would make two points of our own.
The first is to remind readers that this case concerned the VAT treatment of a call option over land – that is, one giving the holder the right to buy. The same VAT treatment would not apply to a put option – that is, one giving the owner of land the right to require the grantor of the option to buy the land. A put option is not considered to be an interest in land and the grant or surrender is standard rated.
The second is a contractual one. Even where (as here) it is considered blindingly obvious that a supply is exempt, there may be no harm in inserting a ‘belt and braces’ clause to the effect that if contrary to all expectations and experience VAT turns out to be chargeable, it is to be paid in addition to the stated consideration.
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