Readers’ forum: Is fee paid to farmer a subsidy or a supply?

I act for a farmer who has recently signed a lease agreement with an organisation which relates to land that he owns and uses for arable purposes.

The lease states that my client will continue to farm the land and produce food and crops at a profit but he must use ‘green friendly’ farming techniques. My client will receive £40 000 a year from the organisation as ‘rent’ for the ten years.

My question concerns VAT: is this income classed as a subsidy (not subject to VAT) to help my client pay for the extra costs he will incur with the changed nature of his farming techniques? Or is the payment exempt from VAT as rent or – if my client has opted to tax the land in question – possibly standard rated? If the answer is that it is a non-VATable subsidy will my client have...