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VAT: HMRC disagreed with its own guidance

An option agreement over land was broken when the seller backed out and paid the would-be buyer £1.4m. HMRC wanted a slice of the action as VAT on the deal.  

4th Aug 2020
Barrister 3PB Barristers
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Kelso
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Option agreements are contracts that allow for a developer to have the option to purchase land from a seller during an option period. They are commonly used pending approval of planning permission whilst allowing for a site to be promoted for development and investment.

The question for the FTT in Landlinx Estates Ltd v HMRC (TC0776) was whether the release from an option agreement (essentially the seller backing out) was an exempt supply of land for VAT purposes.

Ending the agreement

Landlinx signed an option agreement as a buyer for a site known as Loxwood Nurseries. The seller granted Landlinx the option to buy the property within two years on the condition of planning permission being granted. For VAT purposes there was no option to tax, so transactions concerning the land should have been exempt from VAT.

A few months after planning permission was granted, the parties formally agreed to release the obligations between them, terminating the option agreement, provided the seller paid Landlinx £1,425,000.

VAT treatment

Landlinx treated that receipt of £1,425,000 as consideration for an exempt supply for VAT purposes. HMRC decided that the Landlinx had made a taxable supply in respect of the receipt of the £1,425,000 and issued a VAT assessment for £237,500.

Law

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