A ruling by the European Court of Justice (ECJ) could mean that UK farmers who were incorrectly removed from a VAT simplification scheme may be entitled to a repayment of VAT or compensation from HM Revenue & Customs (HMRC).
The Agricultural Flat-Rate Scheme (AFRS) is a method of VAT simplification whereby farmers with qualifying agricultural, forestry or fishing activities can join the scheme. Under its rules, instead of recovering VAT incurred on their underlying costs, they can receive a flat-rate compensation of four per cent to the value of their sales.
However, HMRC has “routinely withdrawn” AFRS certificates from farmers if the compensation received means that they gain a much greater net benefit than under normal VAT registration. This is apparently to “protect the revenue”.
One example of this was Shields & Sons Partnership, which was removed from the AFRS by HMRC in 2012. The business challenged HMRC’s decision before the UK’s VAT tribunal and, although the First Tier Tribunal (FTT) dismissed the appeal, the reviewing court referred the case to the ECJ.
The ECJ’s ruling was 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.
Once the UK leaves the EU, the UK will no longer be bound by EU VAT legislation and the Government could decide to ignore the ECJ’s findings. However, in the meantime, UK farmers wrongly removed from AFRS would be entitled to a VAT refund or some other form of compensation.
