Farmers removed from VAT simplification scheme could be due a refund

04 July 2017

Farmers who have been incorrectly removed from a VAT simplification scheme may be entitled to a repayment of VAT, or compensation, from HMRC.

The opinion from an Advocate General to the European Court of Justice has stated that individual farmers cannot be excluded from the agricultural flat-rate scheme (AFRS) for reasons other than those specified under the European VAT Directive, and that to do so would indicate that the United Kingdom has failed to properly implement and regulate the scheme.

The AFRS is a VAT simplification method, adopted widely across the EU, intended to remove the administrative burden of normal VAT rules. Farmers with qualifying agricultural, forestry or fishing activities can join the scheme. Instead of recovering the VAT on their underlying costs, scheme members receive a flat-rate compensation of 4 per cent to the value of their sales. Therefore under AFRS, there is no VAT accounting at all. In some years, depending of the value of their sales and purchases, some farmers will gain a net benefit and in other years they may suffer a net loss. 

However, as a measure to ‘protect the revenue’, HMRC routinely withdraws farmers’ AFRS certificates if the compensation received results in a farmer obtaining a much greater net benefit than it would under normal VAT registration.

The opinion from the Advocate General has stated however that this practice is against the fundamental principles of the European VAT Directive. A farmer fulfilling the criteria for participation in AFRS can legitimately expect that he will have the right to access the scheme, and remain in that scheme, irrespective of the actual financial results of that membership in individual tax years.

If it were to transpire that HMRC was habitually removing individual farmers from AFRS for the ‘protection of the revenue’, then that is an indication that the UK has failed to regulate AFRS at the macro-economic level.

The European Court doesn’t always agree with the Opinions of its Advocate Generals but, if it were to do so in this instance, UK farmers wrongly removed from AFRS would be entitled to a VAT refund or other form of compensation.

It would also beg the question of what the UK would do about the application of AFRS in the future.

Of course, on leaving the EU, the UK would no longer be bound by EU VAT legislation; the UK could therefore decide to ignore the Court’s findings and await Brexit. This could however result in infraction proceedings and penalties against the UK.

Another option would to determine that, as the current 4 per cent compensation is far too generous, it should be reduced, or removed. However, given that UK farmers will no longer receive CAP subsidies after Brexit, reducing farmers’ income further by amending AFRS is unlikely to be well received.

If you would like any more information on this issue please get in touch with David Wilson or your usual RSM contact.