English court ruling on agricultural lease VAT could impact Scots landlords

A recent decision in the English courts has caused concern following the reduction of VAT to 15% last month.

It was decided that a change to VAT rate payable on rent for an agricultural holding amounted to a variation of the rent itself, so that the next ensuing variation was postponed until three years after the date of change.

The decision was reached on the basis that VAT is merged with the rent so far as the tenant is concerned, even though the landlord has to account for the VAT charged. The court found that the variation of the VAT rate was, for the purposes of rent review, a variation of rent.

The consequence of this is that each time the VAT rate is changed this could amount to a rent review.

The rate decreased on 1^st December 2008, but it will return to 17.5% in 2010 and there may be a subsequent increase.

Unless the law is clarified either on appeal or by parliament, each VAT rate change will be considered to be a review in England and Wales. As a result, rents cannot be conventionally reviewed for three years after that event.

It's not clear that this judgement will be followed in Scotland. We are aware of a case in which the Land Court decided that the relevant Scottish statutory wording differs from the equivalent English statutory wording.

This is currently under appeal, but the Court of Session will not consider this until 2010. This means uncertainty in the interim. However, only Landlords who have opted to charge VAT on rents may be affected.

• Only those agricultural landlords who have opted to tax are potentially affected – this means the majority of landlords will not be affected by this. However, some tenants on bigger estates may be affected and potentially have a better position for negotiating
• We do not know for sure whether a court in Scotland will follow the English ruling.
• Where rent review notices have been issued against Martinmas 2009, this issue should be considered with advisers. There may have been a review of rent as at the effective date of decrease of VAT which might prohibit a further rent review (in other words, the risk factor of proceeding to the Land Court would have to be considered carefully).
• Landlords currently considering an option to tax should consider this carefully with their advisers and possibly postpone a decision until this is clarified.
• It is thought that rent reviews at Martinmas 2008 are not affected.

For more information please contact Elizabeth Plath at Thorntons Land and Rural Business Team on 01382 229111 or email eplath@thorntons-law.co.uk

Issued by Beattie Communications on behalf of Thorntons Solicitors.
Contact: Kimberley Hamilton, Tel 01698 787878