Dear Money Mentor,

My son has a small contracting business. He is registered for VAT and has gotten a lot of VAT back when he is buying machinery and diesel. We are thinking of handing over an out farm to him. He will get a herd number and farm in his own right. One concern he has is that he will have to de-register for VAT. Would he be able to stay registered?

Regards,

Francis

Dear Francis,

The simple answer to your question is yes, he can stay VAT registered and take over the farm. He will lose out on the 5.4% flat-rate addition on agricultural sales. However, depending on the farming system, this might not be that much compared to what VAT he can claim back on the inputs and machinery.

Farmers engaged solely in farming activities are not required to register for VAT. A non-registered “flat rate” farmer gets the 5.4% flat rate on sales. However, no VAT can be recovered on day-to-day expenses, such as repairs, veterinary and diesel. In most farming systems, this should not outweigh the value of the flat-rate addition on supplies, as most of the larger expenses – such as feed and fertiliser – are subject to 0% VAT in any event.

The farmer can still recover VAT on capital expenditure, such as construction of farm buildings, fixed plant, fencing, land reclamation, etc, via the VAT 58 refund mechanism.

So registering for VAT for any farmer is really about working out which system you are financially better off in. Another consideration is that VAT-registered farmers have to submit VAT returns every two months, which could add costs if you get your accountant or bookkeeper to do it.

In theory, your son could de-register for VAT and move to the flat-rate system as long as the contracting business does not exceed certain limits.

For instance, a farmer whose supplies of agricultural services, such as agricultural contracting, exceeds or is likely to exceed €37,500 in a continuous period of 12 months must register and account for VAT on all supplies – including farm production, such as dairy and beef supplies.

It means he would not have to charge VAT on the contracting services. He would have to be careful as, however, if he moved over the limit on a rolling 12-month average, he would have to charge VAT on all services. This would lead to a big VAT bill to be repaid. So if he is any way close to the limit, better to stay VAT registered.

One query I got is for farmers who contract rear heifers. They were asking if it was an agricultural service and if they have to charge VAT if they go over the threshold of €37,500. The answer according to Revenue ruling was no, they do not.

If your son was well under these threshold limits and wanted to de-register, a repayment of VAT recovered from Revenue may arise. It is not as simple as just stopping.

The amount of VAT paid to Revenue on sales will be compared with the amount of VAT that has been refunded on inputs or purchases for the period of registration of 18 VATable periods, which is three years, before the de-registration, whichever is shorter. You will have to refund the difference to Revenue if there is any.

In calculating any repayment to Revenue on de-registration, a farmer can offset VAT that would have been recoverable on capital items – such as shed construction and fixed plant – that they would have been able to claim if unregistered.

You can also take a credit for the flat-rate addition, at the rate in place at the time of the transactions (which ranged from 4.8% to 5.4%), on cattle and milk sales that would have been due to them had they been flat-rate farmers throughout the specified period.

So the first step is to work out if this was positive or negative over the last three years. You might need the help of an accountant to do that. If there is a lot of money to be repaid, look closely to see when it arose. If it is more than two years ago, it might be worth waiting until it is washed out of the calculation that takes into account the last three years. CL

In brief

• Farmers who do not register for VAT get a flat rate on all sales.

• Farmers can elect to register.

• Farmers who supply agricultural services exceeding €37,500 in a 12-month period must register.

• You can de-register but have to look back up to three years and potentially pay a refund.

• Talk to your accountant to work out best plan.