Mason v Boscawen

For the purposes of a notice to pay under Case D of Schedule 3 to the Agricultural Holdings Act 1986, “rent” includes VAT charged on the consideration for the tenancy. VAT is not a separate debt with an independent statutory recovery mechanism. It forms part of the consideration payable for occupation of the land.

A notice demanding the rent inclusive of VAT is therefore not invalid merely because earlier invoices separately identify the net rent and VAT. A notice is sufficiently clear if a reasonable tenant, informed by the relevant invoice, can identify the precise sum required to preserve the tenancy. The inclusion of VAT may nevertheless affect the timing of the statutory rent-review cycle under Schedule 2, even though that consequence may be inconvenient.

The claimant was the tenant of an agricultural holding under an annual tenancy. The landlord elected to waive the exemption from VAT on 90 per cent of the rent and served an invoice for the rent plus VAT.

After the claimant failed to pay the total sum, the landlord served a notice to pay under Case D of Schedule 3 to the Agricultural Holdings Act 1986, followed by a notice to quit. The parties referred two questions of law to the court under section 45 of the Arbitration Act 1996: whether VAT formed part of “rent” and whether the notice was sufficiently clear.

1. The notice to pay did not overstate the rent. The modern meaning of rent is the total periodic monetary consideration payable for the tenant’s right to possess the land. Under section 19(2) of the Value Added Tax Act 1994, the consideration for a supply is inclusive of VAT. The landlord’s obligation is to account for VAT, not to hold it as agent or trustee for HMRC.

2. The VAT element was therefore part of the rent for Case D of Schedule 3 to the Agricultural Holdings Act 1986. There was no separate free-standing statutory right to recover VAT. If VAT were excluded from rent, many landlords would have no contractual means of recovering it.

3. The argument that “rent” should exclude VAT to preserve the three-year rent-review cycle was rejected. Schedule 2 did not provide an exception for changes caused by an election to tax or by changes in the VAT rate. The court declined to read such words into the statute. The resulting possibility of an unintended rent freeze was a matter for Parliament.

4. The notice was sufficiently clear. It demanded a precise sum of £6,047.94 inclusive of VAT. A reasonable tenant would have understood, from the notice and the invoice already received, what had to be paid to avoid termination. The Notice to Pay was valid.

5. The first question was of general importance. The judge indicated that, if applied for, leave to appeal would be granted on that question under section 45(6) of the Arbitration Act 1996.