What are the pros and cons of registering for VAT
It is worth looking back over your books to see if you could be eligible for a significant refund
No farmer or farming company is obliged to register for VAT but some do and many wonder if they should. Every farmer incurs quite a substantial annual VAT cost on farm inputs and services with the exception of feedstuffs, fertilisers, seeds and oral animal medicines.
However, to offset that, he/she also receives VAT on farm produce sales in the form of what is known as the 'flat rate refund' which currently amounts to 5.4pc.
All farmers, farm partnerships and farm limited companies who are not registered for VAT are entitled to claim a refund of VAT incurred on capital expenditure on farm buildings, land improvement and also on certain items of fixed plant such as bulk tanks, milking facilities, automatic scrapers, etc.
Unfortunately, that's the extent of it and any VAT incurred on other inputs cannot be claimed. Where a farmer opts to register for VAT he/she can claim a refund of VAT incurred on all farm inputs, farm services, farm machinery and commercial vehicles as well as the VAT on items that could have been claimed if he/she was not registered.
Where the farmer purchases machinery or commercial vehicles on a reasonably regular basis, it may be worth considering to register for VAT.
It is not a difficult task to assess your annual farm accounts to see if you would benefit by being registered. The first thing to do is sit down and do a rough appraisal of how much you spent on machinery and commercial vehicles over the past 10 years.
This will give you an indication of your average annual expenditure. The next step is to look at your annual farm accounts and determine how much VAT you could have claimed and how much you would have received in a given year. If you paid out more VAT than you received in you should repeat the exercise on another year's accounts to see if the pattern is consistent. The following table gives a profile of a 70 suckler cow farmer selling the progeny as weanlings.
The net annual benefit of registration in the example shown is €1,929 which is a significant sum of money if one had it in one's pocket.
However, if you have to pay a bookkeeper or your accountant to prepare and file your VAT returns, the benefit will be reduced, maybe to the point that it is not worth the bother of registering.
Remember, the net benefit of registration will be subject to income tax PRSI and Universal Social Charge.
The principal determining factor in whether you should register for VAT will generally be how much your average spend on farm machinery and commercial vehicles is. If it's significant, registration will generally be well worthwhile.
You contact your local tax office to register or download a TR1 form from the Revenue website. You can do this online once you are set up online with Revenue. Once registered you will be required to make bi-monthly returns showing a summary of VAT received in and VAT paid out.
Where you have a substantial refund, Revenue may look for copies of invoices making up the refund. You will at some stage be subject to a full VAT audit but the frequency of repeat audits is generally quite low, probably 10 years or more.
If at any stage you want to cancel your registration you will be required to pay back the net benefit gained since first registering or the net benefit gained in the previous three years, which ever is the lower figure.
While registration may yield a worthwhile financial return, it is not without its downsides which will be any or all of the following;
• More frequent inspections of your records by Revenue
• Additional bookwork and possible cost of same
• De-registering will result in a clawback of net benefit received in the 3 previous years.
Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, Accountants and Registered Auditors. www.som.ie. Ph: 051 640397
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