VAT tribunal ruling raises important questions for farmers using flat rate schemes
By Heather Bright, Partner and ARA specialist
A recent VAT tribunal decision has highlighted how easily farming businesses can be caught out by technical tax changes, particularly where long-standing schemes are quietly amended.
In this case, a small farming business successfully appealed a significant late VAT registration penalty after a judge concluded that it was reasonable for the farmer to have been unaware of a key rule change.
The decision may have wider implications for other farms relying on simplified VAT arrangements.
What was the issue?
The case centred on changes made to the Agricultural Flat Rate Scheme, which many smaller farming businesses use to simplify VAT administration.
Under the scheme, farmers charge a flat rate percentage on sales instead of registering for VAT in the usual way.
However, reforms introduced in early 2021 meant that businesses with taxable turnover above a set threshold were no longer eligible and were required to register for VAT.
In this instance, the farming business exceeded the revised limit but did not realise it needed to notify HMRC and move into the VAT system.
When the issue was later identified, the business registered promptly and paid a substantial amount of VAT that had become due. Despite this, HMRC issued a penalty for late registration.
Why the tribunal decision matters
Late registration penalties are rarely overturned, particularly where the taxpayer argues that they were unaware of a change in the law. Ignorance is generally not accepted as a defence.
However, the tribunal took a different view in this case. The judge found that the VAT reform was a significant change that had not been clearly communicated to the type of businesses affected.
The changes were not widely publicised in a way that a small farming enterprise would reasonably be expected to notice.
As a result, the tribunal concluded that the farmer had a reasonable excuse for failing to register on time and overturned the penalty.
What this means for other farmers
While this ruling does not automatically cancel penalties in similar cases, it does send an important signal.
First, it reinforces that VAT rules applying to farming schemes can and do change, sometimes with little visibility. Long-standing arrangements should not be assumed to remain unchanged indefinitely.
Secondly, it highlights that HMRC’s approach to penalties may be challenged where there is a genuine lack of awareness caused by poor communication, particularly for smaller, non-specialist businesses.
Finally, it serves as a reminder that farms with diversified activities such as holiday lets, direct sales or non-traditional enterprises may cross VAT thresholds more easily than expected.
If you are concerned about a potential tax penalty or investigations from HMRC, speak to our team today.