VAT scheme controversy: Farmers incorrectly removed could be entitled to refund or compensation

A recent case heard in the European Court of Justice could mean that farmers who have been incorrectly removed from the agricultural flat-rate scheme (AFRS) – a VAT simplification scheme – may be entitled to a repayment of VAT, or compensation, from HM Revenue and Customs (HMRC).

AFRS is a simplification method that is widely adopted across the EU, which helps to remove the administrative burden of normal VAT rules on farmers.

It is open to farmers with qualifying agricultural, forestry or fishing activities, which allows them to receive a flat-rate compensation of four per cent to the value of their sales, instead of recovering the VAT on their underlying costs.

This means that for some there is no VAT accounting at all, and depending of the value of their sales and purchases, some farmers gain a net benefit and in other years they may suffer a net loss – creating a simpler, fairly balanced VAT system.

However, it has recently been revealed that on some occasions HMRC withdraws farmers’ AFRS certificates if the compensation received results in a farmer obtaining a much greater net benefit than it would under normal VAT registration.

In a recent ruling the Advocate General to the European Court of Justice has stated that individual farmers cannot be excluded from the agricultural flat-rate scheme (AFRS), as this practice went against the fundamental principles of the European VAT Directive.

It is important to note that the European Court doesn’t always agree with the rulings of its Advocate Generals, in this instance, were it to do so UK farmers wrongly removed from AFRS would be entitled to a refund or some other form of compensation.