Changes to the VAT agricultural flat rate scheme

Feb 23, 2021

Although not a direct consequence of the UK’s departure from the EU, the UK acted in January to make changes to the VAT agricultural flat rate scheme. A revised notice has been published which sets out how the scheme works from 1 January 2021. In the coming weeks, HMRC is planning to hold a joint webinar with the Chartered Accountants Ireland Ulster Society on these changes. Details of the event are to follow.

The purpose of the agricultural flat rate scheme is to simplify the record-keeping and administration burden of VAT for small farming businesses – the scheme is therefore an alternative to VAT registration.

If you register as a flat rate farmer under the scheme, you do not account for VAT or submit returns, meaning you cannot reclaim input tax. However, the farmer charges the flat rate addition (‘FRA’) of 4 percent when it sells goods or goods and services to VAT-registered customers. This 4 percent is retained by the farmer as it is not output VAT but acts as compensation for losing input VAT recovery on purchases. According to HMRC, it is not intended as reimbursement for all the VAT incurred on purchases which might otherwise have been recoverable if the farmer was VAT registered.

HMRC has acted to amend the scheme due to concerns that it is being used by larger farmers, such as cattle dealers, who may be deliberately generating sales on which the 4 percent FRA is charged which they then retain.  This also has the potential to artificially inflate cattle prices and may lead to more cattle movements (which is bad for animal welfare) than is strictly necessary.

From 1 January 2021, changes have been made to the scheme to introduce turnover entry and exit limits.  Prior to this there was no turnover limit; however, HMRC had indicated that they expected users of the scheme to have a total of no more than £3,000 added to invoices (the 4 percent FRA) in their first year with no restrictions thereafter.  

The new turnover entry and exit tests are much more restrictive and are as follows:

  • farmers must have turnover from farming activities that is less £150,000 before they can join the scheme and
  • ·once in the scheme, if a farmer’s annual turnover exceeds £230,000, they must immediately leave the scheme and register for VAT.

More details are available in revised VAT notice 700/46. At present it is not clear how HMRC intends to police compliance with the revised scheme. Readers will be updated as the information is available.