Farmers often ask me if it would be worthwhile for them to register for VAT.
All farmers are entitled to reclaim VAT on investments in soil improvement, farm buildings and fixed equipment, but not on operating or overhead costs or on farm machinery or vehicles.
Farmers, including agricultural businesses, are not required to register for VAT regardless of their turnover, but can do so if they wish.
However, if a farmer runs a contracting business or any other type of service, he is obliged to register if the turnover from this activity exceeds €37,500 per year.
To compensate unregistered farmers for VAT on farm inputs and overheads, they will automatically receive the VAT “flat rate refund” of 5.4 percent of the sales value of farm products such as cattle, sheep, corn and milk.
If a farmer opts for VAT registration, he is no longer entitled to the flat-rate refund. They are required to notify anyone they sell product to — or through marts — that they will no longer receive the 5.4 percent refund.
The sale of hay and silage is exempt from VAT and does not fall under this obligation.
To determine if registering for VAT is worth it, farmers need to determine how much VAT they pay on average each year and what their lump sum refund is worth.
This can mean looking back over several years.
Table 1 shows an example of a dairy farmer with 100 cows (Farmer A) who uses a contractor for his silage harvesting and manure spreading and a 250-strong arable farmer (Farmer B) who has all his own machinery.
Farmer A would lose €4,699 by registering and Farmer B would gain €3,978.
In general, registration will only benefit those farmers who are highly mechanized and have high annual capital replacement expenses.
Although Farmer B spends an average of €35,000, the benefit of registering is not significant and will be even less after accounting for compliance costs and income tax.
So make the totals very carefully as there are not too many cases where VAT registration brings a significant financial benefit.
Clawbacks or VAT charge
Reclaiming VAT, whether as a registered or unregistered farmer, can have consequences if you sell your farm or simply stop farming or are no longer registered at all.
There are a number of situations where VAT may be reclaimed or where a disposal may be subject to VAT.
■ When an unregistered farmer applies for a VAT refund through the VAT 58 procedure, a reclaim arises if the farmer stops farming or the buildings or land for which the application was made within 12 months for agricultural Purposes no longer uses VAT is incurred.
This is an unusual scenario, but it can happen, especially when a farmer decides to sell his farm to his limited liability company.
This has to be considered when a farm is sold or a farmer stops farming.
■ A sale of land could become subject to VAT if farm buildings were erected or land improvements made within five years prior to the sale, which led to a VAT refund claim.
VAT may be due on sale, whether or not the farmer is subject to VAT. This can cause difficulties in the sale, as the buyer will most likely not be able to recover the VAT paid.
■ If a VAT-registered farmer sells after the 5th year but within 20 years after a new development (or 10 years after a renovation), he/she will face a reclaim of the VAT refunded for the development, unless he/she she may agree to the buyer applying VAT to the sale.
■ If a registered farmer chooses to deregister, they may be required to repay the accumulated net benefit compared to if they had not been registered in the three years prior to hiring.
VAT claims from unregistered farmers
All applications from unregistered farmers for VAT refunds on expenses incurred for the construction of farm buildings, land drainage and reclamation, hedges, underpasses and solid plant parts are made via a VAT58 form, which must now be submitted online through eRefunds.
You will need the details of your claim, including the invoice number, supplier details and the amount of VAT claimed.
You do not need to attach any supporting documents to your claim unless requested to do so, but all invoices should be retained for six years as they may be requested for inspection by the Inland Revenue.
Each claim must be greater than €125 and a separate claim must be made for each calendar year.
Claims can be made up to four tax years after the expenses were incurred.
Martin O’Sullivan is the author of the ACA Farmers’ Handbook and is an agricultural business and accountant based in Carrick-on-Suir; www.som.ie
https://www.independent.ie/business/farming/agri-business/finance/martin-osullivan-is-it-worth-registering-for-vat-you-need-to-do-the-sums-for-your-farm-41864628.html Martin O’Sullivan: Is VAT registration worth it? You have to do the sums for your farm