Should I register for VAT? Crunch numbers and see
Do the maths to find out if you are better off paying VAT than not
This is the time of year when farmers are digging out bills and invoices for their accounts and the end of year returns. It's also at this time that the sheer amount of VAT that farmers pay on everything from phone bills to machinery parts becomes really apparent.
It leaves a lot of farmers wondering why they still haven't registered for VAT. But, in actual fact, in many cases there are plenty of good reasons for not becoming registered.
Unlike the vast majority of businesses, farmers have the right to choose whether they become VAT registered or not. The only requirement for you to remain unregistered is that you are solely engaged in farming. In this case, you are entitled to a flat-rate addition to your sales of produce and livestock. The flat-rate addition is 5.2pc of the sale price.
This is intended to compensate you for VAT paid on input costs. This is the 21pc charged on machinery, sprays, diesel, electricity etc. Services such as labour on machinery repairs, professional fees and contractor services should be charged at 13.5pc.
In addition, a flat-rate farmer is entitled to repayment from Revenue of the VAT element on certain capital expenditures. This relates to money spent on construction, extension, alteration or re-construction of buildings or structures that will be mainly used for farming purposes. Also included is the capital expenditure on fencing and drainage and land reclamation for farming use.
There are, however, circumstances where farmers are obliged to register for VAT. Examples include where you have an off-farm service business that has an annual turnover greater than €37,500. If it is a trading-based business, the threshold is raised to €75,000.
You will also be obliged to register for VAT when you buy more than €41,000 of goods from other EU countries. There is also a requirement to register where reverse-charge services are provided by non-Irish providers.
So what type of farmer should be electing to register for VAT? There's a simple way to find out the answer to this question. Just crunch the numbers. If the 5.2pc flat rate is not covering the total VAT you are shelling out on your purchases, then it will make sense.
If it is a borderline case, the advice is to wait and monitor the situation. But don't procrastinate. If it makes sense, make the change on time -- elections cannot be backdated.
Also bear in mind that registering for VAT will add to your book-keeping bill. A lot of farmers pay between €1,500-2,500 to get their annual accounts done up. If you register for VAT you will need to do a VAT return every two months. To get a bookkeeper or your accountant to do this for you, you are talking about at least another €1,200 on to the yearly bill. This additional cost is of course deductable in arriving at your profit for income tax purposes. However, contrary to popular belief, you will not be more likely to be on the Revenue's audit hit list just because you are registered for VAT.
Once you have decided to register, the method of electing is quite simple, involving the completion of a form provided by Revenue. However, VAT registration has its responsibilities. For example you'll need to keep the proper records as provided by the VAT regulations, issue invoices, and charge VAT at the appropriate rate on your supplies where VAT is applicable.
You'll also need to inform the businesses you supply that you are now registered for VAT. This will of course result in you losing the flat-rate addition that you may have been claiming on your supplies. If you don't do this, and you continue receiving the flat-rate addition, you will find yourself liable for this amount.
You will remain VAT registered until the business ceases or until you decide to "de-register". Again, this is straight-forward, with just a notification to the Revenue of your cancellation required.
The only thing to bear in mind if you are considering cancelling your registration is that there may be a clawback of refunds of VAT already received.
This will be based on a calculation by you or your accountant on the amount of VAT refunds that you have claimed over the previous three years (or from the date of election if shorter than three years).
If the amount of VAT refunded exceeds the amount paid, the difference must be paid to Revenue.
Michael Hough is a tax specialist with Owen Sweetman & Co in Balbriggan, Co Dublin
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