Tenancy – Rent – Notice to quit – Defendant landlord issuing notice to pay for sum including VAT on rent – Whether VAT element constituting rent – Whether notice invalid as overstating amount due – Ruling in favour of defendant
The claimant was the tenant of a farm under an annual tenancy that had been granted in 1988. The property consisted of a dwelling-house, buildings and agricultural land. Under the terms of the tenancy, the rent was payable by quarterly instalments in arrears on the usual quarter days. The initial rent was £7,875 pa. By clause 3(2), the tenant also agreed to pay the land tax and “all other taxes, rates, charges, assessments and outgoings whatsoever… which are now or may hereafter be assessed, charged or imposed upon the farm or the owner or occupier in respect thereof”.
In 2001, the defendant landlord informed the claimant that he had decided to add VAT to his commercial and agricultural rents. Since the claimant’s holding included a dwelling-house, 90% of the rent was subject to VAT, but the remaining 10% was exempt. The defendant subsequently served the claimant with a notice to pay, demanding a sum representing the rent due and the VAT charged in respect of the agricultural holding.
The claimant failed to pay that sum and the defendant purported to serve a notice to quit based upon case D of Schedule 3 to the Agricultural Holdings Act 1986 on the ground that the claimant had failed to comply with the notice to pay.
The claimant demanded arbitration; he took the view that the amount due did not constitute “rent” for the purposes of case D. An arbitrator was appointed, but, under section 45 of the Arbitration Act 1986, the parties agreed to refer the matter to court for a determination as to, inter alia, whether a notice purportedly served pursuant to case D was valid where it sought to include a sum in respect of VAT on the basis that the landlord had elected to waive its exemption from VAT pursuant to para 2 of Schedule 10 to the Value Added Tax Act 1984. It was common ground that if the word “rent” in case D did not include VAT, the notice had overstated the amount due and was invalid.
Held: The court ruled in favour of the defendant.
The VAT element of the sum demanded formed part of the rent so that the notice to pay had not overstated the amount due and was therefore valid.
When the 1986 Act was passed, grants of land were exempt supplies for VAT purposes and waiving the exemption was impossible. In those circumstances, it was impossible to attribute to parliament an intention to distinguish between elements of the rent on which the supplier was liable to account to HM Revenue & Customs (HMRC) as VAT and elements of the rent on which the supplier was not so liable. The VAT was merely part of the global price for occupation of land and its fiscal consequences did not affect its character.
The tenant could deduct the VAT element of the rent from its own output tax at the end of the quarter and it could deduct the rest of the rent from its profits at year end before paying its income tax. That was merely a difference in the machinery for accounting for tax. It did not mean that different characteristics had to be attributed to different parts of the rent: Plumb Brothers v Dolmac (Agriculture) Ltd [1984] 2 EGLR 1; (1984) 271 EG 373, Goldsworthy v Brickell [1987] Ch 378, and JW Childers Trustees v Anker [1996] 1 EGLR 1; [1996] 01 EG 102 considered.
The modern meaning of “rent” was the total periodic monetary consideration for the tenant’s right to possess the land let to it. The prima facie rule under the 1984 Act was that the sum agreed for the supply included VAT. It was for the supplier to account for VAT to HMRC. Whether the VAT was specified in a VAT invoice depended upon whether the party to whom the supply was made was a taxable party, but “rent” in the 1986 Act had to bear the same meaning, whether or not the tenant was a taxable party. There was no free-standing or independent statutory right to recover VAT. If it did not form part of the rent, the landlord had no means of recovering it. If an all-inclusive rent was agreed and the rate of VAT subsequently changed, the amount of the change would be added to or deducted from the consideration for the supply. The same would apply where the landlord and the tenant had agreed a rent when no VAT was chargeable and it subsequently became chargeable: Property Holding Co Ltd v Clark [1948] 1 KB 630, Sidney Trading Co v Finsbury Corporation [1952] 1 All ER 460, United Scientific Holdings Ltd v Burnley Borough Council [1977] 2 EGLR 61; (1977) 243 EG 43 and 127, Hostgilt Ltd v Megahart Ltd [1999] STC 141 and Debenhams Retail plc v Sun Alliance & London Assurance Co Ltd [2005] EWCA Civ 868; [2005] 3 EGLR 34; [2005] 38 EG 146 considered.
Martin Rodger QC (instructed by Burges Salmon LLP, of Bristol) appeared for the claimant; Leslie Blohm QC (instructed by Foot Anstey Hancock Caffin, of Truro) appeared for the defendant.
Eileen O’Grady, barrister