The Agricultural Flat Rate Scheme

The Agricultural Flat Rate Scheme (the Scheme) is an alternative to VAT registration for farmers and other businesses involved in agricultural production activities.

Currently users of the Scheme can add an amount of 4% to invoices issued to VAT registered customers, and those customers can recover the amount as if it was VAT.

Users of the Scheme keep this amount but are unable to recover VAT on costs as input tax.

As a general point, the Scheme is only of financial benefit to businesses that incur costs with a small amount (less than 4%) of VAT relative to their turnover. For example, a farming business with turnover of £200,000 could potentially gain if the business incurred VAT of less than £8,000. If the VAT on costs amounted to more than this the business would be better off registering for VAT.

Many farming businesses will incur VAT equivalent to much more than 4% of turnover and will prefer to be registered for VAT so that the VAT can be recovered as input tax, subject to the normal rules.

The policy of HM Revenue & Customs (HMRC), as published in the 18 October 2012 edition of VAT Notice 700/46, is that an application to use the Scheme will be refused if the applicant would stand to gain more than £3,000 (compared to a normal VAT registration) in the year following the application. Under EU law, it is possible for HMRC to exclude certain categories of farmers from using the Scheme, but the Court of Justice of the European Communities has decided that farmers that would stand to gain by using the Scheme cannot be regarded as a category of farmer that can be excluded from using the Scheme.

It remains to be seen if or when HMRC will publish a revised edition of VAT Notice 700/46 to reflect the Court decision. In the meantime, businesses that would stand to gain more than £3,000 by using the Scheme could consider submitting an application to HMRC and refer HMRC to the Court decision in Shields & Sons Partnership [2017] EUECJ C-262/16.

Please contact the Garbutt + Elliott VAT team if you would like further advice on the Scheme.