Accounting for an APN, Flat rate scheme for Farmers, and Trust Registration Service

In our latest tax tips email for accountants we said:

Tax solutions generally have to be found to solve issues arising from accounting transactions, but when an Accelerated Payment Notice (APN) is received, an accounting solution must be found for this tax-generated problem, as we explain below. There is good news for farmers who use the special VAT flat rate scheme for their industry, and further good news for tax advisers who are trying to register trusts with HMRC.

Below is just an extract from that email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Flat rate scheme for Farmers

If you have clients in the farming or forestry sectors you should be familiar with the VAT agricultural flat rate scheme (AFRS). It’s an alternative to regular VAT for farmers, and is designed to compensate farmers for the VAT they suffer on purchases by simplifying the cashflow.

Under the AFRS the farming business is not VAT registered, so it can’t reclaim VAT on its input costs. Instead the business charges a flat rate addition (FRA) at 4% on its qualifying sales to VAT registered businesses, who reclaim the FRA as if it was VAT. The farmer keeps the 4% FRA he charges on his sales. The scheme has been around for years, but HMRC don’t publicise it.

HMRC has routinely cancelled farmers’ entitlement to use the AFRS where their earnings under the scheme substantially exceed the input VAT which they would have been able to deduct if they were subject to normal VAT arrangements. This is not one of the conditions which precipitate compulsory cancellation of the AFRS set out in the VAT regulations.

Shields and Sons is a farming partnership which was removed from the AFRS by HMRC in 2012, as it had benefited from the scheme by approximately £375,000 over seven years. Shields challenged HMRC’s decision, and eventually won their case when it reached the European Court of Justice (CJEU).

The CJEU confirmed that the UK doesn’t 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. The European VAT Directive does allow the exclusion of “categories” of farmers, but not those who are simply good at working the system.

The CJEU also said that a farmer must be able to objectively assess, in advance, if he can legitimately expect to meet the criteria to access and to remain in AFRS. Excluding successful farmers from the AFRS on the basis that their reward from the scheme is “substantially more” than that of another farmer does not meet the objective criteria of being a “category” of farmer.

If you have farming clients who have been incorrectly removed from the AFRS, they may now be entitled to a repayment of VAT, or compensation, from HMRC. The Government could decide to lower the FRA from 4% to another percentage, or once the UK has left the EU, scrap the scheme altogether.