The interaction of EU and UK VAT Law with UK land law is bound to throw up some interesting (unnecessarily complicated?) decisions.
It is perhaps unusual that the FTT found these different areas of law to be consistent. The question was whether the release of an option to purchase land was a taxable supply of services or a supply of an interest in land, which would be exempt unless opted to tax. The FTT helpfully provided a definition: As a matter of English law, a call option, duly protected by a notice or a land charge, prevents the grantor of the option from selling the property unencumbered to a third party.
The ECJ had previously asked a similar question in Lubbock Fine. The FTT bravely but courteously disagreed with the opinion of the Advocate General in that case (see paras 83-86).
HMRC referred to their Notice 742, para 7.4, and then indicated that they were about to issue updated guidance which altered the wording of that guidance (see paras 21-22).
Ultimately the Tribunal held that an option to purchase a property is an interest in land, so must be exempt from VAT, unless there is an option to tax.
The alternative position, it said, was illogical.
Furthermore, if the grant of an option, as HMRC contends, were not to be exempt from VAT this would lead to strange results - two economically equivalent transactions would be taxed in different ways. Thus, if a vendor of land sold the land to a purchaser for £1 million the transaction would be exempt from VAT. If, however, the vendor granted the purchaser a call option over the land for an option premium of £100,000 and an option exercise price of £900,000, and the option was exercised the option premium would be subject to VAT at 20% and the remaining purchase price of £900,000 would be exempt. Thus a “one-step” purchase will be taxed differently from a “two-step” purchase even though the economic effect of both transactions was the same. It is hard to believe that this was the intention of the Sixth Directive and it is even more difficult to conclude that such a result accords with the principle of fiscal neutrality. This would be a strange result, which of itself suggests that it cannot be right.
HMRC may still change their guidance to make such supplies taxable. If they do so, this will create real uncertainty.
If you regularly deal with commercial property transactions, this decision is worth a read.