UK farmers who have been incorrectly removed from a VAT simplification scheme may now be entitled to a repayment of VAT, or compensation, from the UK’s tax authority.
The agricultural flat-rate scheme (AFRS) is a VAT simplification method whereby farmers with qualifying agricultural, forestry or fishing activities can join the scheme.
Instead of recovering VAT incurred on their underlying costs, they can receive a flat-rate compensation of 4 per cent to the value of their sales.
HM Revenue & Customs has, however, historically and routinely cancelled farmers’ entitlement to use the scheme where their earnings under AFRS substantially exceeded the input VAT which they would ordinarily have been able to deduct if they were subject to normal VAT arrangements.
One such farmer, Shields & Sons Partnership, was removed from the AFRS by HMRC in 2012 because, during the previous seven year period, it benefited from a financial advantage amounting to some £375k 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.
The CJEU further ruled that, as a principle of legal certainty, a farmer must be able to objectively assess if he can legitimately expect to meet the criteria to access and to remain in AFRS.
By excluding farmers from the flat-rate scheme on the concept of an amount that is ‘substantially more’ than another, the UK does not meet such principles either.
RSM VAT Director David Wilson said that on leaving the EU, the UK would no longer be bound by EU VAT legislation.
Mr Wilson said that the UK could therefore decide to ignore the CJEU’s findings and await Brexit, or determine that the current 4 per cent 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 would be entitled to a VAT refund or other form of compensation.