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Important changes to the Agriculture Flat Rate Scheme

In the detail of the 2020 budget there was a note to say that there would be new entry and exit rules introduced for the Agricultural Flat Rate Scheme (“AFRS”).

This change was not particularly well publicised and as such had gone unnoticed by many. In the limited information given by the government, they have stated that changes are being made to the scheme following an informal consultation with businesses and their representatives in 2019.

Who will be affected?

As of 1 January 2021 new rules apply to align the AFRS with the Flat Rate Scheme. In order to join the AFRS, turnover from ‘farming activities’ must be less than £150,000 per annum. Any business already in the AFRS must leave the scheme if turnover from farming activities exceeds £230,000 per annum. This limit is assessed on each anniversary from joining the scheme.

Any business with turnover from farming activities that may be in excess of the new threshold should check their certification date of joining the scheme. If turnover from farming activities is greater than £230,000 in the 12 months leading up to the first anniversary date occurring after 1 January 2021, the business must leave the scheme from the anniversary date and notify HMRC within 30 days. In most cases the business will instead be required to register for VAT.

Example

A business has an AFRS certification anniversary of 1 July. The turnover from farming activities in the 12 months to 30 June 2021 was £300,000. That business will be required to leave the AFRS and register for VAT from 1 July 2021 and notify HMRC by 30 July 2021.

Any business now registering for VAT should consider its ability to recover input VAT that may have been incurred in the past.  Broadly speaking, a business is able to reclaim input VAT incurred on goods in the 4 years prior to registration, provided those goods are still held at the registration date. This could include commercial vehicles, plant and machinery, IT equipment, amongst other things. A business is also able to recover input VAT on services received in the 6 months prior to registration.

Associated businesses

It is also worth noting that as of 1 January 2021 a further rule is in place preventing businesses from using the scheme where they are ‘associated’ to another business.

Broadly speaking two businesses are associated where one business is under the dominant influence of the other, or they are closely bound by financial, economic and organisational links.

No doubt these changes will cause a number of businesses in the agricultural and farming sector to re-assess their VAT position. The AFRS was always intended to be a simplification scheme, rather than to provide any financial benefit to effected businesses.

Over recent years, HMRC has become concerned that some businesses may be obtaining a substantial financial benefit using the AFRS compared to the normal VAT scheme. These changes would appear to be aimed at tackling the amount businesses can benefit, at least in part.

For further advice or information on how you or your business might be affected by the scheme, please get in touch with a member of our Agriculture and Rural Business team or give us a call on 01903 234094.