HMRC sign© Nicholas Bailey/REX/Shutterstock

UK farmers incorrectly removed from a VAT-simplification scheme may now be entitled to a repayment of VAT or compensation from HMRC.

This follows a European Court ruling on the agricultural flat-rate scheme (AFRS).

The flat-rate scheme is an alternative to VAT registration for agricultural, forestry and fishing businesses.

Instead of recovering VAT incurred on their purchases, those who register for the scheme can charge and keep a flat-rate addition (FRA) of 4% of the value of their sales to VAT-registered customers.

If the value of non-farming activities is above the VAT registration threshold, then a farmer cannot join the flat-rate scheme.

The FRA is not VAT but acts as compensation for losing input tax on purchases.

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“HMRC has, however, historically and routinely cancelled farmers’ entitlement to use the scheme where their earnings under the AFRS substantially exceeded the input VAT which they would ordinarily have been able to deduct if they were subject to normal VAT arrangements,” said David Wilson, VAT director at accountant RSM.

“One such farmer, Shields & Sons Partnership, was removed from the AFRS by HMRC in 2012 because, during the previous seven-year period, it benefitted from a financial advantage amounting to some £375,000 from its use of the scheme.

“Shields challenged HMRC’s decision before the UK’s VAT tribunal and, although the first-tier tribunal dismissed its appeal, the reviewing court (the upper-tier tribunal) referred the case to the European Court.”

“The decision of the European Court [CJEU] has now been released and confirms that, although the European VAT directive does allow the exclusion of ‘categories’ of farmers, the UK does not have a general discretion to remove individual farmers from AFRS where they are simply recovering more using the scheme than they would under standard VAT accounting rules.”

On leaving the EU, the UK would no longer be bound by EU VAT legislation, said Mr Wilson. The UK could, therefore, decide to ignore the CJEU’s findings and await Brexit, or determine that the current 4% compensation is far too generous and should be reduced, or removed.

In the meantime, as the European VAT directive and decisions of the CJEU have direct effect, UK farmers wrongly removed from AFRS re-entitled to a VAT refund or other form of compensation.