by Jeremy de Souza
Before the introduction of the new rating system, landowners were in practice able to avoid liability to rates on the sporting rights retained by them over let farms. Does the same device work under the new system?
Under the old rating system, it was possible to avoid liability by a two-fold device. This involved the landowner letting the farm without a reservation of sporting rights (stage 1) and contemporaneously taking a licence back from the farmer of the sporting rights (stage 2).
The rationale behind this device was that stage 1 involved no severance because the whole farm was let and stage 2 involved no severance because a tenancy of a profit a prendre can only be created by deed.
The question therefore arises as to whether this device will still be effective under the new rating system. To be liable to pay the national non-domestic rate, one has to be on the non-domestic rating list. Under the Local Government Finance Act 1988, section 64(4)(d), sporting rights are entered on the list only if they are severed from the agricultural land over which they are exercisable. It follows from this that, if a severance can be avoided, the sporting rights will not be entered on the list and those enjoying them will not be subject to taxation under the formulation to be found in section 65(9) of the 1988 Act, which does constitute a change in the law.
It is therefore necessary to examine the basis of the scheme which worked under the old legislation. The leading case, Burnell v Dawnay (1952) 160 EG 534, was decided in the Lands Tribunal and was contested on the basis of a concession that, in relation to construing stage 1, the fact that stage 2 was contemporaneous should be ignored. Under the Westminster rules of construction followed at that time, this concession was rightly made: see IRC v Duke of Westminster [6] AC 1. It would not be made now. Where a composite transaction is involved, under the Ramsay doctrine, it is legitimate to look at the transaction as a whole: see W T Ramsay v IRC [1982] AC 300. If one does this by construing stage 1 in conjunction with stage 2, it is apparent that an effective retention of the sporting rights out of the agricultural land let has been achieved.
One then has to consider whether it is of the essence that this transaction was not carried out by deed. If one were to look at stage 2 in isolation, it would be, but a severance of land, as opposed to a profit, can take place otherwise than by deed: Cleobury Mortimer Rural District Council v Childe [3] 2 KB 368 at pp 378 and 382.
It seems, therefore, that the old “licence back” scheme does involve a “severance”, with the result that the sporting rights should be entered on the non-domestic rating list.
The question then arises as to whether the landowner or the farm tenant is liable to pay the rates. Section 65(9) of the 1988 Act requires them to be paid by “the person who is entitled to receive rent (if the right is let) or to exercise the right to let (if the right is not let)”.
For this purpose, “let” must mean by deed: Whitby (VO) v Warrington Anglers Association [5] 2 EGLR 225; (1985) 276 EG 1169. It follows that the farm tenant, although the person “entitled to receive rent”, is not the accountable party because the right is not “let”.
One has next to consider who has “the right to let”. It is important to appreciate, in this context, that, although the Ramsay doctrine would have operated in such a way as to amalgamate stages 1 and 2, the letting of the farm inclusive of sporting rights at stage 1 nevertheless has legal effect. Although (probably) entered into by agreement under hand, the farmer could call for a delivery of a lease under seal. This would mean that he, rather than the landowner, had “the right to let”.
It is open to doubt, however, whether the farm tenant is “entitled…to exercise” that right. He would almost certainly be prohibited from doing so without consent under the tenancy agreement, but that would probably make no difference so far as the construction of this phrase is concerned. But what has really prohibited him from exercising the right is the fact that he is contractually bound under the licence (ie stage 2). In consequence, although the point cannot be regarded as free from doubt, the tenant farmer is probably not the accountable person under section 65(9).
No other possibilities are provided for under that subsection and it is clear that some accountable person must be identified. One has, therefore, to return to stage 1, where the owner has let the farm without reserving sporting rights. In that capacity he does receive rent and it is considered that in all probability the courts would, ultimately, hold him to be the accountable party.
From the landlord’s point of view, it may, nevertheless, be thought to be worth taking the risk, but two factors will militate against doing this. First, the tenant’s solicitor is unlikely to be willing to place his client in the position of being potentially liable for the sporting rates, and, second, the landlord’s VAT position on his farm rents will need to be negotiated with the Customs & Excise. If the sporting rights are dealt with in a severed form, this problem does not arise.
