Landlinx Estates Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 May 2020 |
| Neutral Citation | [2020] UKFTT 220 (TC) |
| Date | 13 May 2020 |
| Court | First-tier Tribunal (Tax Chamber) |
[2020] UKFTT 220 (TC)
Judge Guy Brannan, Mr Julian Stafford
Tim Brown, counsel, appeared for the appellant
Isabel McArdle, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Release of an option to acquire land – Whether an exempt or taxable supply – VATA 1994, Sch. 9, Grp. 1 – VAT Directive 2006,art. 14 and 135(1).
The FTT concluded that the reverse surrender of an option to acquire land was a right over land which was exempt from VAT (subject to the option to tax).
Landlinx had an option to purchase a plot of land which was suitable for residential development. After Landlinx had obtained planning permission the owner of the land paid it £1,425m to release it from its obligations (the reason for this change in intention is not explained).
Landlinx treated this income as exempt from VAT on the basis that it related to a supply of a right over land and there was no option to tax in place (neither Landlinx nor the seller had opted to tax). However, HMRC determined that Landlinx had made a taxable supply. HMRC argued that Landlinx did not have an interest in land, it only had an option to purchase one, and therefore could not have made an exempt supply to the land's owner.
The FTT concluded that the surrender was, under the provisions of Sch. 9, Grp. 1 of VATA an exempt grant of an interest in land (see para. 76). This conclusion was based on the facts that:
- Note 1 to the Group specifies that grant includes … reverse surrender; and
- Under English land law an option of the type granted by the land owner creates an interest in land.
Before allowing the appeal on this basis the FTT had to consider whether this conclusion was in keeping with the Principle VAT Directive. It concluded that it was for two reasons:
- The relevant Article of the PVD is art. 135(1)(j) which exempts the supply of a building or parts thereof, and of the land on which it stands …. This Article, in the view of the FTT, comprehended supplies which comprise the transferor's entire interest in the land and buildings but also the transfer of a lesser or derivative interest in the land and buildings i.e. interests in rem in the land and buildings, such as the Option Agreement in this appeal. The FTT based its reasoning on the ECJ decisions in Lubbock Fine & Co v C & E Commrs (Case C-63/92) [1993] BVC 287 and Staatssecretaris van Financiën v Shipping and Forwarding Enterprise Safe BV (Case 320/88) [1991] BVC 119 (see para. 86); and
- To fail to exempt the reverse surrender of the option would be counter to the purpose of art. 135(1) which is to exempt immovable property from VAT (see paras. 88 and 89).
The FTT also noted that failing to exempt the supply of an option over land would give rise to “strange results” (see para. 94) and that para. 7.4 of Notice 742 specifically states that the grant of a right to purchase an interest in land is a supply of an interest in land (see para. 101).
Although the FTT has made a determination on the meaning of a provision of EU law it declined to refer to the ECJ for a reference.
The appeal was allowed.
It is well established that the grant of a lease and the surrender (and reverse surrender) of a lease are all land transactions which are exempt, subject to the option to tax. Given that HMRC's Public Notice specifies that the grant of an option is also an interest in land, the FTT reached a logical conclusion in deciding that the surrender of an option should have the equivalent treatment.
[1] This appeal raises the question whether the release (for a consideration) of an option to purchase land is a taxable supply of services or an exempt supply of an interest in land for VAT purposes.
[2] Hitherto, the published practice of the Respondents (“HMRC”) has for many decades been to treat the grant of an option to acquire land as an exempt supply. We were informed that HMRC has now reconsidered its position and has formed the view 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.
[3] Accordingly, this appeal raises an important point of principle in relation to the correct VAT treatment of the surrender of an option to acquire land.
[4] It is worth noting at the outset that no option to tax was made in respect of the land in question in this appeal.
[5] HMRC decided that the appellant, Landlinx Estates Ltd (“Landlinx”), had under-declared its output tax on its 12/16 VAT return by £237,500. This decision was reached on the basis that HMRC considered that the amount of £1,425,000 received by Landlinx for the release of an option to purchase land (“the option”) was a taxable supply made by it and not an exempt supply of land. Landlinx now appeals to this Tribunal against that decision.
[6] HMRC informed us that they were planning to revise their published practice in relation to the tax treatment of options to purchase land.
[7] In this decision we shall, for simplicity, refer to the Court of Justice of the European Union and its predecessor, the European Court of Justice, as the “ECJ” or “the Court”.
[8] Although there was no agreed statement of facts, the facts in this appeal were not in dispute.
[9] Mr William Wilcox, a director of Landlinx, furnished a witness statement but he was not required for cross-examination because his evidence was not disputed.
[10] Landlinx was registered for VAT with effect from 1 January 2010.
[11] In 20 March 2015, Landlinx signed an “Option 1 Agreement” (“the Option Agreement”) as the Buyer relating to the purchase of Loxwood Nurseries in West Sussex. The agreement provided that the Seller granted Landlinx the Option subject to the conditions in the agreement; the Option being defined at page 7 as “the option during the Option Period to buy the Property or part or parts of it …”
[12] The Seller did not opt to tax Loxwood Nurseries pursuant to Schedule 10 VAT Act 1994.
[13] The intention of the parties was that the Option Agreement was an enforceable contract for the sale and purchase of property in accordance with section 2 Law of Property (Miscellaneous Provisions) Act 1989 (at Clause 8.2 of the Option Agreement).
[14] The Option Agreement was entered into by Landlinx with a view to obtaining planning permission from the local authority to develop the site. On or about 1st July 2016, planning permission was duly obtained by Landlinx.
[15] On 22 December 2016, the parties formally agreed to release the obligations between them under the Option 1 Agreement on payment of a sum of £1,425,000 by the Seller to Landlinx.
[16] In early 2017, Landlinx submitted its VAT return for the 12/16 period for a repayment of £23,503.47. This amount was significantly higher than usual amount due to the amount of expenditure incurred in respect of Loxwood Nurseries. It treated the receipt of the £1,425,000 from the Seller as consideration for an exempt supply for VAT purposes and therefore did not include it on the VAT Return.
[17] Shortly thereafter, HMRC began enquiring into the 12/16 Return.
[18] After correspondence between Landlinx and HMRC, HMRC issued a formal decision dated 28 June 2017 to the effect that the Appellant had made a taxable supply in respect of the receipt of the £1,425,000 and issued an assessment for £237,500.
[19] On 18 July 2017, Marden & Co, Landlinx's accountants, wrote to HMRC asking for HMRC's decision to be formally reviewed.
[20] HMRC's decision was upheld on an internal review by letter dated 20 September 2017 on the basis that, although HMRC accepted the grant of the call option was an interest in land and was therefore an exempt supply, the surrender of that interest did not “provide the landowner with any right in the land.”
[21] The review letter acknowledged that Notice 742 stated that the grant of an option over land was an exempt supply but stated that it did not give guidance on whether the surrender of an option was the supply of an interest in land.
[22] As already indicated, HMRC have now changed their interpretation of the law in that the granting of a call option is not an interest in land that falls within the exemption from VAT.
[23] As we understood it, it was also common ground that, if Landlinx had exercised its option and purchased Loxwood Nurseries from the Seller, that transaction would have been an exempt supply by the Seller to Landlinx.
[24] The Option Period granted to Landlinx was two years, subject to any extensions under the terms of the Option Agreement (Clause 1 “Definitions”). The consideration for the grant of the option was £1 (Clause 1 “Definitions” and Clause 3.1). The grantors of the option were referred to as “the Sellers”.
[25] Clause 3.3 provided that the option could not be exercised unless Planning Permission had previously been granted.
[26] Clause 7. A .1 provided a complex formula for determining the price on exercise of the option.
[27] Clause 8.1 provided that the option was exercisable by notice in writing from Landlinx to the Seller at any time within six months after the agreement or determination of the price in accordance with Clause 7. A.
[28] Clause 17 provided:
17.1 If the Seller sells or otherwise dispose [sic] of its freehold interest in the Property or any part of it the Seller will:
17.2 Give not less than twenty (20) Working Days' notice to the Buyer of the Seller's intention to dispose of the Seller's interest to the Third Party and
17.3 Ensure that immediately upon completing...
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