Farmers need to establish how much VAT they pay out annually on average, and how much their flat-rate refund is worth
Farmers often ask me whether it would be worth their while registering for VAT.
All farmers are entitled to claim back VAT on capital expenditure on land improvement, farm buildings and fixed plant installations, but not on input or overhead costs or on farm machinery or vehicles.
Farmers, including farming companies, are not obliged to register for VAT, irrespective of their turnover, but they can if they want.
However, where a farmer operates a contracting business or other type of service, they are obliged to register if the turnover from that activity exceeds €37,500 per annum.
To compensate unregistered farmers for VAT incurred on farm input and overhead costs, they automatically receive the ‘flat-rate refund’ of VAT amounting to 5.4pc of the sale value of farm produce such as cattle, sheep, corn and milk.
Where a farmer opts to register for VAT, they are no longer entitled to the flat rate refund. They are obliged to notify all the people they sell produce to — or through in the case of marts — that they will no longer receive the 5.4pc refund.
Sales of hay and silage are VAT-exempt and do not fall under this requirement.
Doing the maths
To determine if registering for VAT is going to prove worthwhile, farmers need to establish how much VAT they pay out annually on average, and how much their flat-rate refund is worth.
This may mean taking a look back over a number of years.
Table 1 sets out an example of a 100-cow dairy farmer (Farmer A) who gets his silage harvesting and slurry spreading done by contractor, and a 250ac tillage farmer (Farmer B) who has all his own machinery.
Farmer A would lose €4,699 by being registered and that Farmer B would gain €3,978.
Generally, registration will only benefit those farmers who are heavily mechanised and have a hefty capital replacement annual spend.
Despite farmer B spending €35,000 on average, the benefit of registration is not significant and will be even less after taking account of compliance cost and income tax.
So do the sums very carefully as there are not too many cases where VAT registration will bring a significant financial benefit.
Clawbacks or exposure to VAT
Claiming back VAT, whether as a registered or unregistered farmer, can have consequences if you sell your farm or if you simply cease farming or indeed cease being registered.
There are a number of situations where VAT can be clawed back or where a disposal may be liable to VAT.
■ Where a non-registered farmer claims a VAT refund through the VAT 58 process, a clawback arises if the farmer ceases to farm or ceases to use the buildings or land in respect of which the claim was made for farming purposes within 12 months of the VAT having been incurred.
This is an unusual scenario, but it can happen, particularly where a farmer decides to sell his farmyard to his limited company.
It is something to bear in mind where a farm is being disposed of or where a farmer ceases to farm.
■ A disposal of land could become liable to VAT where farm buildings were erected or land improvement took place that resulted in a VAT refund claim within five years prior to the sale.
VAT may be due on the sale even though the farmer may or may not be VAT-registered. This may cause a difficulty with the sale as the buyer, more than likely, will not be able to recover the VAT paid.
■ Where a VAT-registered farmer sells after Year 5, but within 20 years of a new development (or 10 years of a refurbishment), he/she will face a clawback of VAT recovered on the development unless he/she can agree with the purchaser to apply VAT on the sale.
■ Where a registered farmer decides to de-register, they will be liable to repay the cumulative net benefit, if any, as compared to if they had not been registered in the three years prior to ceasing.
VAT claims by unregistered farmers
All claims by non-registered farmers for VAT refunds on expenditure incurred on the erection of farm buildings, land drainage and reclamation, hedgerows, underpasses and fixed plant items are made by way of a Form VAT58, which is now required to be filed online through eRepayments.
You will need the details of your claim, including the invoice number, the supplier details and the amount of VAT being claimed.
You do not have to include supporting documentation for your claim, unless requested to do so, but all invoices should be kept for six years as these may be required by Revenue for inspection.
Each claim must be greater than €125 and a separate claim must be made for each calendar year.
Claims can be lodged up to four tax years subsequent to the expenditure being incurred.
Martin O’Sullivan is the author of the ACA Farmers’ Handbook and is a farm business and tax consultant based in Carrick-on-Suir; www.som.ie