Friesian farm rents
29 Jun 09
Unfortunately, beyond the farm gate no one much cares about land rentals and VAT
by Gregor Buick
Any change in taxation produces winners and losers and in that respect the Chancellor’s decision late last year to reduce VAT from 17.5 per cent to 15 per cent was no exception.
But the effect on agriculture is turning out to be of much greater significance than a one-seventh reduction in the rate of value added tax would imply.
Following the Chancellor’s action, a relatively swift decision of the High Court in London ruled that the VAT change was a “variation” in rent, effectively freezing all farm rents for the next three years – as required by the Agricultural Holdings Act of 1986 which states that a rent cannot be changed for at least three years after it is agreed. North of the border, the relevant equivalent legislation, the Agricultural Holdings (Scotland) Act of 1991 (as amended in 2003) is not substantially different – although the issue has not yet been tested in a Scottish court.
As for the winners and losers, the former in this are, most likely, to have been tenant farmers whose rents were due for review and who would, in most cases, be facing higher rental bills had the VAT changes not led to a de facto freeze. Only in a small minority of cases would a review have led to a reduction in rent.
Given that the change in the rate of VAT was largely motivated by the UK’s greatest financial crisis for at least 80 years, the consequence for farm leases was probably considered unimportant at Nos 10 and 11 Downing Street – if it was thought about at all. Furthermore, in the eyes of the general public (especially those who live in urban areas), tenant farmers are generally regarded as more deserving of sympathy than farm owners.
But looked at without bias, the owners may be more deserving of sympathy than the public are prepared to give them. Many landlords would no doubt have had good reason to justify an uplift in rent, to help pay for the renewal of buildings and other capital equipment; these will now have to be put back as a result.
But their concern is what happens at the end of the year. The Chancellor has announced he will revert back to VAT at17.5 per cent in 2010, which on the basis of the recent High Court ruling means another “variation” in rent and, by implication, another freeze for the three years after that. If carried through to its logical conclusion, some farm rents will have been frozen for seven years (i.e. three years up to 2009, three years after 2010 and the year in between).
In terms of financial reward in return for effort, tenant farmers probably make up the lowest paid skilled workforce in the country, so few people can personally begrudge them this unexpected term of “rent relief”. Looked at from the wider agricultural viewpoint, however, the net effect must be to dampen farmland asset values and, by implication, further debilitate the industry.
If the new regime is not challenged in the Scottish courts, or if a challenge is made and defeated, then legislation to reverse the current situation will be required. But with so much Government time and effort devoted to rising urban unemployment, falling house values, and a squeeze on consumer and commercial credit, will the parliamentary time ever be found?
GREGOR BUICK is an associate with the law firm Murray Beith Murray, based in Edinburgh.