Value added tax (VAT) is deducted at source, i.e. it is a silent stealth tax. Income tax is more painful because, each November, you can see it being taken from your bank account and visibly reduce the amount of money you have to spend.

VAT and profit levels

Like all businesses in the State, farmers not carrying on another VAT-able business have the option to register for VAT, allowing them to reclaim VAT on input expenses such as machinery, sprays, contractors, power, diesel, professional fees, etc. VAT in most cases is 23%.

Why don’t farmers register?

Those farmers who remain unregistered for VAT are entitled to a deemed flat-rate addition of 5% to their sales of produce and livestock.

This mechanism is intended to compensate farmers for VAT suffered on direct input costs.

In addition, the VAT-unregistered farmer is entitled to the repayment of VAT suffered on certain capital expenditure, such as construction, extensions, alterations or reconstruction of buildings and structures of the farm business, including drainage and land reclamation and fixed capital equipment.

Should I register for VAT?

In general, low mechanised farm enterprises, such as dairying and drystock, do not register for VAT.

There is no substitute for running the numbers to see if the 5% flat-rate VAT addition, plus the VAT entitlement on capital works, exceeds the VAT you would be entitled to reclaim if you were registered.

Where the benefit attaching to registration is marginal, you should factor in additional annual bookkeeping and accounts preparation costs and a possible visit from the tax inspector to see if your bookkeeping and invoicing systems are satisfactory.

Guidance for unregistered farmers:

  • Would you benefit significantly from being VAT registered? – Compare the two by running the numbers.
  • There is a four-year cut-off time limit on reclaiming VAT on qualifying capital works – check to see if you have reclaimed your entitlement.
  • Impact on machinery financing

    There are complicated VAT rules concerning the purchase of second-hand agricultural machinery by VAT registered farmers.

    The right of the VAT-registered farmer purchasing agricultural machinery mostly depends on whether the previous owner was VAT-registered or not.

    If the previous owner was VAT-registered, then the VAT element can be reclaimed by the purchaser. If not, there is no automatic VAT refund entitlement unless the machinery dealer is prepared to facilitate this.

    Example

    Peter is a VAT-registered farmer and wishes to purchase a tractor from a dealer which is advertised with an all-in selling price of €40,000.

    Peter is not aware of the fact that it was previously owned by a VAT-unregistered farmer. He purchases the tractor thinking he can reclaim the VAT. The position is as follows:

    The tractor has cost Peter €7,479 in excess of what he thought it would cost him because he cannot reclaim the VAT. It is vitally important to be aware of the VAT issues prior to agreeing the deal.

    Impact on profitability

    Jimmy’s forestry pay day

    Jimmy is a VAT-unregistered farmer and has forestry reaching maturity. The best offer received by Jimmy for the sale of his trees was €100,000.

    Jimmy asked the merchant: “Am I entitled to VAT?” The Merchant replied: “Oh no, you are not registered for VAT.” This was misleading.

    Jimmy was entitled to a 5% farm flat-rate addition. Based on VAT-exclusive pricing, he was entitled to:

    

    Based on VAT-inclusive pricing, the merchant would be within his rights to raise a settlement voucher showing the €100,000 included a deemed VAT 5% refund which the merchant could reclaim from the Revenue Commissioners, thereby reducing the cost of the purchase to him from €100,000 to €95,238 as follows:

    

    Both the VAT-exclusive pricing and the VAT inclusive pricing methods are legal and, had Jimmy known of the €4,762 potential benefit to the merchant, he could have negotiated a better deal.