VAT Agricultural Flat Rate Scheme

Businesses that use the flat rate scheme pay VAT as a fixed percentage of their VAT inclusive turnover. The VAT Agricultural Flat Rate Scheme is a variant of the flat rate scheme specifically designed for farmers and other activities relating to agricultural production (such as horticulture).

Farmers cannot join this scheme if the value of their non-farming activities is above the VAT registration threshold (currently £85,000). The amount of VAT paid on business expenses becomes irrelevant to VAT returns.

The scheme was introduced to help ease the administrative burden on farmers who found that the requirement to maintain full VAT records had become disproportionally burdensome, usually by reason of the relatively small size of their businesses.

It is a condition of joining the scheme that farmers who are registered for VAT must have their registration cancelled. The flat rate scheme is effectively an alternative to VAT registration for farmers. However, although the farmers will no longer be able to reclaim input tax they can charge a flat rate addition (FRA) currently 4%.

The FRA is not VAT and the farmer is allowed to keep it. The addition acts as compensation for the loss of input tax the farmer would have been able to reclaim if registered for VAT.

Guidance for paying deferred VAT updated

The coronavirus VAT payment holiday gave businesses the chance to defer the payment of any VAT liabilities between 20 March 2020 and 30 June 2020. The option for businesses to defer their VAT payments ended on 30 June 2020.

There are two options available for repaying this VAT.

  • The first option is to pay the deferred VAT in full on or before 31 March 2021. No interest or penalties will accrue on deferred payments that are paid by the new due date and there is no requirement to contact HMRC.
  • The second option is to further defer the amount of VAT due. The VAT deferral new payment scheme will allow businesses the option to pay the deferred VAT in smaller payments over a longer period. Instead of having to repay the full amount by 31 March 2021, businesses will now be able to make smaller interest-free payments during the 2021-22 financial year and thus complete payment of the VAT due by 31 March 2022. 

HMRC has now confirmed that the VAT deferral new payment scheme will be open from 23 February up to and including 21 June 2021. Nearly all businesses are expected to use HMRC’s online service to sign up. VAT registered businesses will need to opt in to the scheme and will not be able to use an agent to do this.

The new scheme will allow businesses to pay their deferred VAT in instalments without adding interest and select the number of equal monthly instalments from 2 to 11 (depending on when they join the scheme). Businesses will need to sign up by 19 March 2021 to benefit from the maximum number of instalments. Businesses must also meet certain conditions to use the scheme including being up to date with their VAT returns.

Anyone using the VAT Annual Accounting Scheme or the VAT Payment on Account Scheme, will be invited to join the new payment scheme later in March 2021.

Accounting for import VAT on your VAT return

Following the end of the transition period, businesses registered for VAT can account for import VAT on their VAT return, often referred to as postponed VAT accounting. For most businesses, this means that they will declare and recover import VAT on the same VAT return. The normal VAT recovery rules that define what VAT can be reclaimed as input tax will still apply. 

These new rules save businesses from having to pay import VAT (at the port of entry) and then having to recover it at a later date. This was the case for many businesses that had been importing goods from outside the EU before the rules changed on 1 January 2021. Accordingly, this change offers cashflow benefits for businesses that had been paying import VAT upfront and then waiting to recover the VAT paid. 

Businesses are able to account for import VAT on imports into Great Britain (England, Scotland and Wales) from anywhere outside the UK. Businesses in Northern Ireland can use the postponed VAT accounting for goods imported from outside the UK and EU. The VAT rules for the movement of goods between Northern Ireland and the EU have not changed and remain as before under the Northern Ireland Protocol.

As off 1 January 2021 VAT registered businesses no longer need approval to account for import VAT on their VAT Return.

Postponed import VAT accounting can be used if:

  • the goods are imported for use in your business
  • you include your business’ VAT registration number on your customs declaration.

Flat Rate Scheme annual review

Using the VAT Flat Rate scheme, businesses pay VAT as a fixed percentage of their VAT inclusive turnover. The actual percentage used depends on the type of business. The scheme has been designed to simplify the way a business accounts for VAT and in so doing reduce the administration costs of complying with the VAT legislation.

The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. The annual taxable turnover limit is the total of business sales during the year. It includes standard, reduced rate or zero rate sales and other supplies. It excludes the actual VAT charged, VAT exempt sales and sales of any capital assets.

As part of an annual review, it may be advisable to check that clients using the scheme continue to qualify. Businesses that have joined the scheme can continue using the scheme provided their total business income does not exceed £230,000 in a 12 month period. There are also special rules where increased turnover is temporary.

A limited cost trader test was introduced in April 2017. Businesses that meet the definition of a 'limited cost trader' are required to use a fixed rate of 16.5%. The highest 'regular' rate is 14.5%. If your clients meet the definition of a limited cost trader then it would be worth investigating if it would be more beneficial for them to leave the scheme and account for VAT using standard VAT accounting.

No VAT on women’s sanitary products

The UK was unable to zero rate VAT on women’s sanitary products under EU rules and the items were subject to 5% VAT. Following the end of the transition period the UK is no longer bound by the EU VAT Directive which mandates a minimum 5% rate of VAT on all sanitary products.

The VAT charge on sanitary products became widely known as the 'Tampon Tax' has therefore been abolished from 1 January 2021. This measure had been announced in the Spring Budget 2020 and honours a government commitment to scrap the tax as soon as was possible. This means that there will be no VAT whatsoever charged on women’s sanitary products.

This measure is part of a wider strategy to make sanitary products affordable and available for all women which includes:

  • January 2020 roll out of free period products for all young people in English state schools and colleges and extension of the scheme into 2021
  • the NHS offering period products to every hospital patient who needs them (including long-term in-patients) since 2019
  • the Tampon Tax Fund, established in 2015, which allocated the funds generated from VAT on period products to projects supporting vulnerable and excluded women and girls

The Tampon Tax Fund will continue to provide funding for projects supporting vulnerable women and girls.

UK VAT claims by non-EU businesses

There are special rules for businesses established outside the EU submitting a claim for VAT incurred on goods or services bought in the UK. The exact rules of what VAT is refundable can be complex. There are also a number of conditions which must be met in order for a claim to qualify.

The deadline for the submission of a refund request for expenses incurred in the UK by non-EU businesses during the period 1 July 2019 – 30 June 2020 is 31 December 2020. However, HMRC has published a new Revenue and Customs Brief setting out actions HMRC is taking to support businesses who have been having difficulties in obtaining a certificate of status. One of the conditions for making a claim is for the claimant to obtain the required certificate of status from their official issuing authorities. This may not be possible due to measures taken by jurisdictions in response to coronavirus.  

HMRC has agreed that due to this specific circumstance, they will allow overseas businesses an additional 6 months to submit a valid certificate of status, which means the certificate of status must be submitted on or before 30 June 2021.

Businesses must still submit their application for VAT refunds and all other documentary evidence required to process their claims on or before 31 December 2020.

Deadlines for paying deferred VAT

The coronavirus VAT payment holiday gave businesses the chance to defer the payment of any VAT liabilities between 20 March 2020 and 30 June 2020. The option for businesses to defer their VAT payments ended on 30 June 2020.

There are two options available for repaying this VAT.

  • The first option is to pay the deferred VAT in full on or before 31 March 2021. No interest or penalties will accrue on deferred payments that are paid by the new due date and there is no requirement to contact HMRC.
  • The second option is to further defer the amount of VAT due. The new VAT deferral payment scheme will allow businesses the option to pay the deferred VAT in smaller payments over a longer period. Instead of having to repay the full amount by 31 March 2021, businesses will now be able to make smaller interest-free payments during the 2021-22 financial year and pay the VAT due by 31 March 2022. 

Businesses will need to opt-in to the new payment scheme by the end of March 2021. The opt in process will be available in early 2021. Businesses will also need to opt in themselves and will not be able to use an agent to do this for them.

The new payment scheme will allow businesses to pay their deferred VAT in instalments without adding interest and select the number of instalments from 2 to 11 equal monthly payments. Businesses must meet certain conditions to use the scheme including being up to date with the submission of their VAT returns.

VAT on delivery charges

The process for working out the VAT treatment of delivery charges can be quite complex.

We have listed below some of the main issues to bear in mind when deciding whether or not VAT needs to be applied.

  • No charge for delivery. HMRC’s guidance is clear that if delivery is free, or the cost is built into the normal sales price, VAT is accounted for on the value of the goods based on the liability of the goods themselves. This applies whether or not delivery is required under the contract.
  • Goods on approval. Where you are delivering goods on approval this service is not classed as delivered goods. In this case, the delivery service is a separate VATable supply.
  • Additional charge for delivery.  There is a single supply of delivered goods for which the VAT liability is based on the VAT liability of the goods.
  • Delivery is not required. If delivery is not included in a contract to supply goods, then the delivery charge is liable to VAT at the standard rate irrespective of the VAT liability of the goods supplied. This assumes the delivery is within the UK.
  • Separate charge for packing. A separate packing service for which a charge is made will be standard-rated within the UK.
  • Food deliveries. The rules as to whether VAT is payable on delivery charges for food follows the VAT liability of the food. For example, the supply of hot takeaway food is usually standard-rated for VAT and a delivery charge would also be subject to VAT.

Where there is a mix of zero-rated and standard-rated items delivered, or where goods are delivered internationally, the situation can be more complex and further attention may be required.

Correcting errors on VAT returns

Where an error on a past VAT return is uncovered, businesses have a duty to correct the error as soon as possible. As a general rule, any necessary adjustment can be made on a current VAT return. However, in order to be able to do so, there are three important conditions that must be met:

  1. The error must be below the reporting threshold.
  2. The error must not have been deliberate.
  3. The error can only relate to an accounting period that ended less than 4 years ago.

Under the reporting threshold rule, businesses can make an adjustment on their next VAT return if the net value of the errors is £10,000 or less. The threshold is further increased if the net value of errors found on previous returns is between £10,000 and £50,000 but does not exceed 1% of the box 6 (net outputs) VAT return declaration figure for the return period in which the errors are discovered.

VAT errors of a net value that exceed the limits for correction on a current return or that were deliberate should be notified to HMRC using form VAT 652 (or providing the same information in letter format) and should be submitted to HMRC's VAT Error Correction team.

HMRC can also charge penalties and interest if an error is due to careless or dishonest behaviour.

Deadlines for paying deferred VAT

The coronavirus VAT payment holiday gave businesses the chance to defer the payment of any VAT liabilities between 20 March 2020 and 30 June 2020. The option for businesses to defer their VAT payments ended on 30 June 2020.

There are two options available for repaying this VAT.

The first option is to pay the deferred VAT in full on or before 31 March 2021. No interest or penalties will accrue on deferred payments that are paid by the new due date and there is no requirement to contact HMRC.

The second option, added by the Chancellor when delivering his Winter Economy Plan, is to further defer the amount of VAT due. The new VAT deferral payment scheme will allow businesses the option to pay the deferred VAT in smaller payments over a longer period. Instead of having to repay the full amount by 31 March 2021, businesses will now be able to make smaller interest-free payments during the 2021-22 financial year and pay the VAT due by 31 March 2022. 

Businesses will need to opt-in to the new payment scheme. HMRC has published updated guidance confirming that the opt in process will be available in early 2021. Businesses will also need to opt in themselves and will not be able to use an agent to do this for you.

The new payment scheme will allow businesses to pay their deferred VAT in instalments without adding interest and select the number of instalments from 2 to 11 equal monthly payments. Businesses must meet certain conditions to use the scheme including being up to date with their VAT returns.