Flat VAT for farmers has shrunkby
Larger farms and farming groups may need to leave the VAT agricultural flat rate scheme (AFRS) immediately because of changes introduced from 1 January 2021.
The VAT agricultural flat rate scheme (AFRS) provides an alternative to VAT registration for farmers. Very broadly, under the scheme farmers do not account for VAT, submit VAT returns or reclaim input tax. Instead, they charge - and keep - a flat rate addition on sales made to VAT registered customers.
Changes from 2021
Although the AFRS has been with us since 1993, two important changes were introduced to restrict its scope from 1 January 2021.
New entry and exit thresholds ensure that the scheme is no longer available to larger farming businesses. These thresholds are the main focus of this article.
Also farmers can no longer be in the scheme if they are, or have been in the last 24 months:
- eligible to register for VAT in the name of a VAT group
- registered for VAT in the name of a division; or
- ‘associated’ with another person.
For these purposes, a person is associated with another person if the business of one is under the dominant influence of the other, or they are closely bound to one another by financial, economic and organisational links.
The new entry and exit thresholds
From 1 January 2021 the AFRS has the following thresholds:
- Entry threshold - in order to join the scheme, annual turnover from farming activities must be below £150,000
- Exit threshold- farmers have to leave the scheme if their annual turnover from farming activities is above £230,000.
For the purposes of the £150,000 entry threshold, farmers need to look at their taxable farming turnover in the year ending with the date of their application to join the AFRS, ie the anniversary of the date they started to use the AFRS.
For the purposes of the £230,000 exit threshold, there are two tests which must be carried out:
- An annual test – at each ‘certification anniversary’, was the total value of taxable turnover from farming in the last year more than £230,000?
- A monthly test - at the end of each month, did the total value of taxable turnover from farming in the last 30 days exceed £230,000?
If either the monthly or annual test is met, the farmer will have to leave the AFRS.
For the purposes of the annual test, the ‘certification anniversary’ is the anniversary of when the AFRS certificate took effect. For example, if an AFRS certificate took effect on 31 December 2018, the total value of taxable supplies in the last 12 months will need to be considered on 31 December each year.
More information on applying these thresholds, and the AFRS more widely, can be found in VAT Notice 700/46.
Why the change?
Prior to 1 January 2021 the AFRS did not have set entry and exit thresholds, and as such there was no strict limit on the size of farming business which could benefit from it. HMRC could however seek to cancel membership of the scheme on the grounds that it was “necessary for the protection of the revenue”.
This approach was challenged in Shields & Sons Partnership v HMRC. In that case, HMRC tried to remove a taxpayer from the AFRS on the grounds that they had derived a significant financial advantage (over £370,000) compared with what their position would have been under the normal VAT rules. Following a referral to the Court of Justice of the European Union (CJEU), the upper tribunal allowed the taxpayer’s appeal and reinstated them to the AFRS on the grounds that HMRC’s criteria for exclusion were incompatible with European Law.
Following this decision, it was announced at the Spring Budget 2020 that the new entry and exit thresholds would be introduced from 1 January 2021. These allow HMRC to easily exclude larger businesses who could stand to gain significant financial benefits from the AFRS.
What do these changes mean?
As of 1 January 2021, those looking to join the AFRS will now need to ensure sure that their taxable turnover from farming is below £150,000, and that they are not excluded by virtue of being part of a group, division or having an associated person.
Those in the AFRS will need to carry out monthly and annual checks on their turnover to ensure they do not exceed the £230,000 exit threshold. They will also need to ensure that any business changes do not result in them acquiring an associated person, or become part of a group or division.
Where a farmer ceases to be eligible for the AFRS, they need to notify HMRC within 30 days of the relevant event (ie the certification anniversary or month end for the exit threshold, or the date of acquiring an associated person or becoming part of a group / division). Farmers, especially those with larger or growing businesses, and their advisers therefore need to be aware of these new rules and keep an eye on their position.
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Emma a technical officer with the Association of Tax Technicians (ATT). Her background is in corporation tax and she also has a focus on VAT.
She trained with Deloitte, working in both their London and Leeds offices, and also spent a short time working in a specialist consultancy firm providing advice to other practitioners before joining...