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Release of Land Purchase Options Are VAT Exempt

Is the release of an option to purchase land a taxable supply of services or an exempt supply of an interest in land for VAT purposes? The First-tier Tribunal (FTT) tackled that issue in a ruling which raised a point of principle of importance to tax professionals and property owners in general.

The case concerned a property company which agreed, in return for £1,425,000, to the release of its option to purchase a plot of development land. HM Revenue and Customs (HMRC) took the view that that was a taxable supply of services and that the company was liable to pay £237,500 in VAT on the transaction.

Ruling on the company’s challenge to that decision, the FTT noted that HMRC’s published practice had hitherto, for many decades, been to treat the grant of options to acquire land, and the release of such options, as exempt supplies. It had, however, recently changed its position – forming the view that such transactions should be treated as standard-rated supplies of services – and was intent on revising its published practice accordingly.

HMRC’s case was that, although the option agreement created an interest in land for domestic English law purposes, it did not confer on the company a right to dispose of tangible property as owner. It did not transfer beneficial ownership of the land, giving only a right to future ownership on exercise of the option. By releasing its rights under the option, the company was thus not surrendering or transferring ownership of the underlying property.

In upholding the company’s appeal, however, the FTT found that its release of the option was a surrender of an interest in land. The policy of European and domestic legislation was that, subject to exceptions, transactions in relation to immovable property should be exempt from VAT. That exemption encompassed not only transfers of an entire interest in land or buildings but also transfers of lesser or derivative interests in such property.

The FTT noted that, given HMRC’s long-standing published practice, the company had every reason to believe that the transaction would be treated as exempt. Having been encouraged in that belief, the company complained of very real unfairness. Given the FTT’s findings on the correct legal position, however, it was unnecessary to express a concluded view on the fairness or otherwise of the VAT demand.