Landlinx v HMRC – are call options a supply of land or a supply of services (for VAT purposes)?
HMRC's long-standing published practice has been to treat the grant of a call option as the supply of an exempt land interest unless the supply of the underlying land would be VATable e.g. because the grantor has opted to tax. An assignment or surrender of a call option has similarly been viewed as an exempt supply of land, again, unless a supply of the underlying land by the option holder would be VATable e.g. because the option holder has opted to tax).
Last year it became known that HMRC's actual view was that call options (whether the grant, assignment or surrender) are not supplies of land and are therefore automatically VATable supplies of services regardless of whether the land is opted. HMRC had indicated that taxpayers could continue to rely on its longstanding published guidance until it was amended to reflect their new position. Ongoing litigation on the point was apparently delaying the revised guidance which was due for publication in 2020. It seems that the litigation was Landlinx Estates Limited v HMRC, the decision in which has just been released.
Landlinx held a call option over land that neither it nor the landowner had opted. After obtaining planning permission it was paid just over £1.4 million by the landowner to surrender the call option and Landlinx treated the surrender as the supply of an exempt interest in land. HMRC viewed the surrender as a VATable supply of services and assessed Landlinx to VAT.
HMRC's argument was that although the grant and surrender of call options could be exempt by reference to the wording in the UK VAT legislation, such supplies fall outside any of the land exemptions contained in the EU VAT legislation. As the UK legislation has to be interpreted in accordance with the EU legislation this would mean that call options are outside the land exemption and therefore subject to VAT. The First-tier tribunal found against HMRC. It held that call options are exempt under the EU legislation and therefore that it would be correct to read the UK legislation as exempting the grant, surrender or assignment of a call option (subject to an option to tax).
This decision is helpful and removes some of the uncertainty for taxpayers making supplies of call options. As mentioned above, HMRC's existing published guidance is in line with this decision and therefore we expect that taxpayers will continue to treat call options as exempt (subject to an option to tax). Hopefully, HMRC will confirm that it now accepts that call options (and other equitable interests in land) are land interests for VAT purposes. In the meantime, a degree of risk remains as HMRC will sometimes disregard decisions of the First-tier tribunal (which do not set binding precedent) and even their own guidance. Risk averse taxpayers may therefore choose to opt to tax the relevant land (if possible) in order to charge VAT on the supply of a call option.
One final point is that the grant of a put option is not generally seen as a supply of land but a VATable supply of services. This is not affected by the Landlinx case.