I welcome you to the Chair, Mr. Atkinson. I have no doubt that what I have to say will test the openness and pragmatism of my right hon. Friend the Financial Secretary.
The clause is an attempt to resolve an unintended consequence of the interaction between the Agricultural Holdings Act 1986 and the Value Added Tax Act 1994, triggered by a court judgment in December last year. That judgment held that when there is a change in the amount of VAT payable, it constitutes a change in the amount of rent payable. Under the Agricultural Holdings Act, that triggers a three-year moratorium on a rent review being referred to arbitrationa common means of resolving farming rent disputes.
Before that case, it was understood that regardless of whether VAT was charged, the sum of any tax was immaterial to the legal right to determine disputed rent. In clause 78, the Government seek to resolve the problem by asserting that neither the levying of the tax, which is dependent on the status of the individual lessor, nor any change in the rate of the tax will be taken into account when determining a right to arbitration. That might appear to resolve the issue entirely, but it would seem that it does not.
Agricultural tenancies often comprise both a house and land, which are treated separately for the purposes of complying with VAT legislation. Commercial land is VATable, but a house is not. However, those two components are often pooled into one rent for a holding. The clause might not address a change in the balance of the rent between the two component parts, one of which is VATable, while the other is not. That might occur naturally according to market circumstances; for example, if the rent on a commercial holding were related to a return that one might achieve from it, and the rent on a house were related to the value of the property, the two elements might vary over time. Such a change in the balance is entirely feasible, but it does not appear to have been anticipated in the Governments narrow change, which merely refers to a change in the rate of VAT, rather than in the amount of VAT that may be attached to the rent.
There may be two ways to resolve the issue. The first option is to accept my amendment. I would be delighted if that happened, because it would be a first for me, having served on a Finance Bill Committee at least three times, although it may be even moreI cannot remember. The second option, which might well suffice, is for the Government to give a clear statement about how the change applies and an understanding of how Her Majestys Revenue and Customs would treat VAT in those circumstances.
My hon. Friend has very helpfully set out the background to the clause and why it is in the Bill. The clause ensures that any change in the VAT paid by an agricultural tenant is not considered to be a change in rent for the purposes of the rent review provision in the Agricultural Holdings Act 1986. Changes in the VAT paid by tenants could arise because the landlord opts to apply VAT to supplies of the agricultural land, which landlords do from time to time, under schedule 10 to the Value Added Tax Act 1994, or because of changes to the VAT rate applicable to such supplies. Of course, we have had one such change recently and we will have another at the end of the year.
I am aware of the concern described by my hon. Friend that the clause as drafted might not cover VAT changes resulting from a reapportionment of rent between commercial and residential elements. We have looked carefully at the issue and my conclusion is that such VAT changes could arise only as a result of the landlords exercise of the option to tax under schedule 10 to the VAT Act 1994. Therefore, those changes are already covered by the current wording of clause 78(1).
I can imagine another circumstance. It is unlikely, but one of our tasks is to consider the unlikely as well as the certain. A landlord and a tenant could agree a reapportionment between them of the two elements of the leaseresidential and commercialwith a consequential change in the amount of VAT payable, but subsequently fall into dispute about how future rents might be determined. If that were the case, and they had an agreement, at that point they would be bound to keep to the three-year period for arbitration. That is something that would not conform to the intent of the clause or for that matter, the intent of those who drafted the original clause, whose purpose was to deal with the protection of an agricultural tenancy.
The intention of the clause and its effect, according to the best advice on these matters, mean that all these situations are covered. Any consequential VAT change would still arise only because of the landlords option to tax. That is why in our view it is covered by subsection (1)(d)(i). I am perfectly willing to reflect further on what my hon. Friend has said and perhaps to discuss the matter further with him. If there is any remaining uncertainty there will be an opportunity to have another look at it, but I am confident that what is here does the job.