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Option
to acquire undeveloped land. Whether Vatable at 21%
Sections 4
and 5 Vat Act 1972(as amended) and article Sixth Directive 1977 Evidence Taxpayer
company received £75,000 for granting a call option entitling the grantee of
the option to acquire undeveloped land owned by the company. The term of the
option expired and the company retained the £75.000 Evidence was
given on behalf of the taxpayer that the transaction was at open market value
with an unconnected purchaser and that tax avoidance was not an issue in the
case. Revenue Did not
dispute the evidence but contended that- ·
the grantee of the
option did not acquire an interest in the land for the purposes of the VAT Act. ·
since the transaction
did not come within Section 4 of the Act it fell to be taxed under Section 5 as
the supply of a service and was therefore liable to VAT at 21% ·
in the event of the
grantee of the option proceeding with the purchase Revenue would allow the
grantor of the option to issue a credit note and treat the option monies paid as
part of the consideration received for the sale of the land PROVIDED that the
underlying contract showed the option monies payable as part of the overall
contract price. ·
in situations where
the price paid for the option was separate from the price shown in the contract
for the purchase of the underlying asset the treatment detailed in the previous
paragraph should not be applied. The Revenue submission stated “We can find no ECJ case that matches the circumstances of this case. As we understand it the grant of an option is the grant of a right for a
specified duration to buy or sell an asset for a specified price. H. Murdoch’s
Dictionary of Irish Law defines an option as “a right, which may be acquired
by contract, to accept or reject a present offer within a period of time.” Clearly, there is a distinction between grant of an option, in this case
the right to buy the land, and the underlying transaction, ie purchase of the
land. The sale of an option does not represent transfer of ownership of the
land, nor in Revenue’s view does it grant an interest in the land for the
purposes of Section 4 VAT Act 1972. As it does not relate to a supply of goods
either for the purposes of Section 3 or Section 4 the supply must be considered
a supply of services. The vendor has granted a right to the customer in return
for consideration, ie a supply of services for consideration. Unless the
services qualify as exempt under the provisions of the First Schedule we do not
see any grounds for treating them as exempt. We cannot see that the grant of an
option constitutes a letting of immovable goods for the purposes of paragraph
(iv) of the First Schedule any more than it constitutes grant of an interest in
immovable goods for the purpose of Section 4. Accordingly, our view remains that
the supply is a supply of taxable services for consideration. The Revenue
Solicitor’s office has supported the view that, in Irish law, an option to
purchase does not create an interest in land. The position in the U.K. may well
be different. The fact that a subsequent purchase of undeveloped land may lead to the
return of the option monies paid does not affect the taxable status of the
consideration received for the purchase of an option. The return of the money
(or the conversion of same to a purchase deposit) represents the cancellation of
the option and a credit note could be issued. We understand that a sale never
took place at all in this matter and the monies were retained. The owner of the
land retained the option monies when the option expired and this falls to be
taxed under Section 5(1).” Taxpayer
contended ·
Consistency: the
grant of a call option should qualify for the VAT status of the associated
transaction. Revenue accord this treatment to traded financial options – see
attachment from Revenue’s booklet “VAT and Financial Services”. ·
Certainty: when an
option is granted there should be no doubt about its VAT status; it should not
change by reference to its exercise or non-exercise. CASE
LAW No decided
cases were referred to by either party to the case. DECISION The
taxpayer’s appeal would be allowed. Legislation VAT
Act 1972 (as amended) Section
1(1) “Exempted
activity “ means – (a)
a supply of immovable goods in respect of which pursuant to Section 4(6)
tax is not chargeable, and (b)
a supply of any goods or services of a kind specified in the First
Schedule ….” “Goods” means all movable and immovable objects, but does not include things in
action or money and references to goods include references to both new and used
goods; “Immovable
goods” means land; “Movable
goods” means goods
other than immovable goods; “Supply”,
in relation to goods, has the meaning assigned to it by section 3 and, in
relation to services, has the meaning assigned to it by section 5, and cognate
words shall be construed accordingly; Section
2(1) “…a tax
shall be charged … (a)
on the supply of goods and services..” Section
3 (1) In this
Act “supply”, in relation to goods, means-
(a) The transfer of ownership of goods by agreement……… Section
4 (1)(a) This
section applies to immovable goods- (i)
which have been developed by or on behalf of the person supplying
them or
(ii) in respect of which the person supplying
them was… entitled to claim a
deduction under section 12 for any tax borne or paid in relation to a supply or
development of them
(b) In this section “interest” in relation to immovable goods, means
an estate or interest therein which, when it was created was for a period of at
least ten years, … (2)… a
supply of immovable goods shall be deemed, for the purposes of this Act, to take
place if, but only if, a person having an interest in immovable goods to which
this section applies disposes …as regards the whole or any part of those
goods, of that interest or of an interest which derives therefrom. (6)
Notwithstanding anything in this section or in section 2 tax shall not be
charged on the supply of immovable goods- (a)
in relation to which a right in favour of the person making the supply to
a deduction under section12 in respect of any tax borne or paid on the supply or
development of the goods did not arise… Section
5 (1)
In this Act “supply”, in relation to a service, means the performance
or omission of any act or the toleration of any situation other than the supply
of goods… Sixth
Council Directive of 17 May 1977, 77/388/EEC “…Whereas
a common list of exemptions should be drawn up so that the Communities’ own
resources may be collected in a common manner in all the Member States… Taxable
Persons Article
4 1.”Taxable
Person” shall mean any person who independently carries out in any place
any economic activity specified in paragraph 2….. 2. The
economic activities referred to in paragraph 1 shall comprise all activities of
producers, traders and persons supplying services…The exploitation of tangible
or intangible property for the purpose of obtaining income therefrom on a
continuing basis shall be considered an economic activity. 3. Member
States may also treat as a taxable person anyone who carries out, on an
occasional basis, a transaction relating to the activities referred to in
paragraph 2 and in particular one of the following; (a)
the supply before first occupation of buildings or parts of buildings and
the land on which they stand; Member States may determine the conditions of
application of this criterion to transformations of buildings and the land on
which they stand……. “A
building” shall be
taken to mean any structure fixed to or in the ground; (b)
the supply of building land. “Building
land” shall mean any unimproved or improved land defined as such by the
Member States. Article
5 1 “Supply of goods” shall
mean the transfer of the right to dispose of tangible property as owner. … 3, Member States may consider the following to be tangible property: (c)
certain interest in immovable property; (d)
rights in rem
giving the holder thereof a right of user over immovable property; (e)
shares or interests equivalent to shares giving the holder thereof de
jure or de
facto rights of ownership or
possession over immovable property or part thereof. …. Article
6 (1).
“Supply of services” shall mean any transaction which does not
constitute the supply of goods within the meaning of Article 5. Such
transactions may include inter alia: -
assignments of intangible property whether or not it is the subject of a
document establishing title, -
obligations to refrain from any act or to tolerate an act or situation -
the performance of services in pursuance of an order made by or in the
name of a public authority or in pursuance of the law. Article
13 Exemptions
within the territory of the country A.
Exemptions
for certain activities in the public interest… B.
Other
exemptions Without
prejudice to other Community provisions, Member States shall exempt the
following under conditions, which they shall lay down for the purpose of
ensuring the correct and straightforward application of the exemptions and of
preventing any possible evasion, avoidance or abuse; … (a)
the leasing or letting of immovable property excluding: 1.
the provision of accommodation…in the hotel sector or in sectors with a
similar function…. Member
States may apply further exclusions to the scope of this exemption; … (g)
the supply of buildings or parts thereof and of the land on which they
stand other than as described in Article 4(3)(a); (h)
the supply of land which has not been built on other than building land as
described in Article 4(3)(b). Commentary
on the legislative provisions The Sixth
Directive makes it clear that unless a Member State has designated land that has
not been built on as “Building land” the supply of that land must be
exempted. In the
present case there is no such indication of any such designation by the State. With regard
to Irish legislation the following comments are relevant. The
definition in Section 4(1)(b) of “interest” has no relevance insofar as
undeveloped land is concerned given the statement in Section 4(1) that the
section applies to immovable goods which have been developed or in respect of
which the owner would have been entitled to a deduction under Section 12 for any
tax borne or paid in relation to a supply or development of them. Separately,
Section 4(1) states that Section 4 applies to developed land. This is, arguably,
misleading in that Section 4(6) quite specifically applies to undeveloped land
and is absolutely categorical in stating that such “immovable goods” shall
not be liable to tax except in the specific circumstances set out in Section
4(6), neither of which applies in the present case. Further,
Section 4(6) refers to “immovable goods” which raises the question of
whether this reference must be to immovable goods as referred to in Section 4(1)
(“This section refers to immovable goods…..”). However, this apparent
paradox surely cannot stand otherwise the rest of the provisions of Section 4(6)
would be meaningless, so that the phrase “immovable goods” in the said
subsection must be taken to refer to those goods in general and not the narrow
subclass referred to in subparagraph (1) of Section 4. Staying with
the word “interest” but dealing with another argument advanced in the case,
the question of whether an option to acquire land amounts to an “interest in
land” for the purposes of the Irish law of property is not, in the opinion of
the Appeal Commissioner, relevant to the application of the principles of EC and
domestic law to the case. The question of what is or is not a supply for VAT
purposes is to be determined under the specific provisions of the VAT Act, the
Sixth Directive and relevant case law. Words used in a narrow legal sense in
statutes or documents particular to Irish land law concepts are not specifically
applied by the Vat Act and the fact that the Interpretation Act 1937 states in
paragraph 14 of the Schedule to that Act “The word “land”
includes messuages, tenements, and hereditaments, houses and buildings, of any
tenure.” (Punctuation as per Butterworths “VAT Acts 2002) while the word
“land” in Section 1(1) of the VAT Act must be construed with reference to
the Interpretation ACT this does not appear to have any bearing on the case
either. Further, the Supreme Court made it clear in the case of “Inspector of
Taxes v Kiernan” that taxing statutes are addressed to the public at large and
words are to be given their ordinary meanings. Is
the grant of an option analogous to “The
transfer of the right to dispose of tangible property as owner”
(Sixth Directive Article 5)? A sale of
freehold land is, quite clearly, a supply for VAT purposes. The question of
whether it is an exempted supply is a separate matter. The
transfer, or the creation out of a freehold estate, of a long leasehold interest
may well amount to a supply. (These comments are being made without reference to
the specific provisions of Section 4 of the VAT Act). The
transferor has given up his right to occupy the property and, except insofar as
rent is payable by the tenant, has no longer any entitlement to profit from it. The grant of
an option which gives the grantee of the option the right to acquire property at
a particular price within a particular time frame does amount to the curtailment
of some of the property rights of the grantor of the option. Until the period
set down in the option agreement has expired the owner of the property has
forfeited the right to benefit from any uplift in the value of the property over
the price at which the grantee may acquire it. During the option period he has
also lost the right to determine the person to whom he will transfer the
property. The act of
granting such an option is quite likely to lead to the actual sale of the
property: the probability of that event occurring varies with each case but, in
the absence of tax avoidance considerations, it seems perfectly proper to treat
the grant of the option in relation to land as, at least, preparatory to the
disposal of the underlying land. Where the land is actually acquired and the
contract for the sale of the land treats the option monies as a down payment on
the price of the land as per the contract, the Revenue are prepared to
effectively treat the option agreement as being merged into the underlying
contract. The Revenue’s approach in this regard is in accord with the
provisions of Article 13B(h) of the Sixth Directive of the European Council but
should, in the Appeal Commissioners opinion, have been applied at the time of
the grant of the option. In the
opinion of the Appeal Commissioner the same logic should apply to an option
granted but not exercised, regardless of whether the contract price is to be
treated as reduced by any prior option payment or not. In the event
of the option being exercised and the underlying sale contract being completed
the practice of allowing the recipient of an option payment to issue a credit
note and, effectively, reclassify the original transaction (viz the grant of the
option) as a component of the contract for sale runs contrary to the concept of
VAT as a tax that applies to transactions. The tax is chargeable when the event
happens. The idea of effectively putting the matter into some sort of suspense
account until its true nature is determined is not one that would give any
degree of certainty regarding the operation of the tax.
The contract governing the grant of the option does not depend for its
character on whether the underlying asset is acquired; nor, as argued by the
Revenue in this case, on whether the option price is expressed, under the terms
of the underlying contract, to be a deposit paid for the land or is a payment
not within the terms of that contract. Where
the option is exercised what happens is that a separate, and related,
transaction takes place; namely the contract for the acquisition of the land is
then proceeded with. The option
operates to reduce the full ownership rights of the grantor in respect of the
underlying asset and, in the absence of other factors, should properly be
accorded the same tax treatment as the disposal of the underlying asset. The
Sixth Directive does not specifically mention options and Section 4(6) of the
VAT Act refers to the “supply of immovable goods” and is silent as regards
options to acquire such goods. That subsection also makes no
reference to the various interests in the said goods which the supplier,
or vendor, may have. It is highly unlikely that anybody would argue that it is
only freehold property that comes within the ambit of 4(6). Transfers of long
leasehold interests must surely come within its terms? In the context of the
provisions of the Sixth Directive governing the sale of undeveloped land it
seems more appropriate to treat options to acquire undeveloped land as coming
within the terms of Section 4(6) rather than to apply the treatment argued for
by the Revenue; which, on some scenarios, requires that the true nature of the
tax treatment of an option should, as already stated, be incapable of being
ascertained for some time. In the
opinion of the Appeal Commissioner, in determining the VAT treatment of options
granted for the acquisition of undeveloped land no distinction should be drawn
between options that relate to contracts that are subsequently completed and
those that are not. When
construed from the point of view of domestic legislation the position is
reasonably clear but, when looked at in the context of the Sixth Council
Directive of 17 May 1977, there is very little doubt that the option in the
present case should be treated as covered by the terms of Section 4(6) of the
Vat Act 1972, with the result that no VAT is chargeable in respect of the said
option. Dissatisfaction
was expressed by the Revenue and the case may be the subject of a Case Stated to
the High Court. |
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