In Hanuman Commercial Limited v HMRC [2017] TC06249, the First-Tier Tribunal (FTT) concluded that the novation of a contract for the sale of land was a standard rated supply not an exempt supply of land.

  • Hanuman planned to convert an office block into residential flats.
  • They entered into a contract to purchase the office block for £2.8 million excluding VAT.
  • This contract was conditional on the tenants vacating and obtaining satisfactory planning permission.
  • The seller had opted to tax the property, but Hanuman had not.
  • Prior to completion of the sale Hanuman entered into an unconditional contract to sell the property to another company (CCL) for £5.5 million excluding VAT.

Hanuman entered into another agreement with the seller to vary the contract:

    • Hanuman agreed to Opt to tax the property, but it did not do so. The aim was to obtain TOGC treatment.
    • They waived the conditions of the contract.
    • The seller consented to the assignment of the contract to the new purchaser.

Hanuman then entered into another contract with CCL which replaced the agreement between Hanuman and CCL to sell and buy the property on the same day as Hanuman acquired the property to a novation agreement, such that CCL became party to the contract with the original contract in exchange for a payment of £2.7 million excluding VAT.

The novation took place. Hanuman charged £540,000 VAT on the £2.7 million fee it received from CCL.

Hanuman reversed the decision to charge VAT at a later date, believing that they had charged it in error. They issued a credit note to CCL and submitted a nil VAT return. Hanuman believed that they had acquired an interest in the property, which it had not opted to tax and therefore its supply to CCL was exempt from VAT.

HMRC issued a VAT assessment on the basis that it was not a supply of Land and property, which was appealed.

The FTT agreed with HMRC that the supply by Hanuman to CCL was standard rated:

  • Had the original contract took place, this would have been a purchase and onward supply of land.
  • The revised contract, i.e. the novation, was not a supply of an equitable interest in land.
  • The novation was a transfer of all of Hanuman’s rights and obligations under the purchase agreement. This novation means that the existing contract between Hanuman and the seller came to an end and a new contract between the seller and CCL exists.
  • The effect of the novation is that the contract between Hanuman and the seller never existed.
  • Hanuman had supplied the right or opportunity for CCL to enter into an agreement with the seller. That is not a supply of goods, it is a supply of services.

This supply of services is standard rated.


VAT: Land & property at a glance

VAT: Land & Property (notes)

Opting to tax land and property

Transfer of a going concern (TOGC)

Transfer of a Going Concern (TOGC) - properties

External link: Hanuman Commercial Limited v HMRC [2017] TC06249


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