Outsourcing can have some tax implications
Outsourcing has been a feature of modern business for many years. Outsourcing has also become a feature of farming, as it becomes more intensive and specialised.
Contract rearing has entered the Irish farming domain, having been adopted from Britain and New Zealand.
A quirky and often unnoticed tax impact is that the supply of “contract rearing” services can be treated as a VAT liable supply, and may become subject to VAT at 13.5%.
Generally, a farmer does not need to register for VAT, however, if the farmer supplies VAT liable services other than pure farming supplies over €37,500, then the individual will need to register for and charge VAT.
Contract rearing, otherwise known as the keep of animals, is not a pure farming supply, and therefore, when income from these activities exceeds €37,500, the contract rearer will need to charge VAT.
Generally speaking, the vast majority of dairy farmers are not VAT-registered and, therefore, where a person who supplies contract rearing services is required to register and charge VAT, this will be an additional direct cost to the dairy farmer, who will be unable to reclaim the VAT charged.
A second negative impact of having to register is that feed, being the largest cost in rearing of animals, is not subject to VAT, and the contract rearer will only be able to reclaim VAT on a very small portion of his or her costs.
There are, of course, tax strategies which can be adopted to legitimately avoid having to register for VAT. These can include: (1) the supply of feed/medicines etc by the farmer directly to the contract rearer. This will reduce the contract rearer’s overheads, and therefore he will be able to charge significantly less fees, and potentially stay below the €37,500 threshold.
(2) The contract rearer may enter into a buy/sell agreement, where he will take ownership of the animals initially. The farmer would retain an option to buy the animals at a set price in, say, two years time. In this case, the supply is not of contract rearing, but of an animal, avoiding the need to register for VAT.
(3) The contract rearer could, as an option, grant short grazing rights to the farmer, which is not subject to VAT. However, where the contract extends to supplying care, then it will be considered to have fallen back into the category of keep, and will become subject to VAT, if overall supplies exceed €37,500.
As always, each taxpayer’s circumstances should be examined on a case by case basis for the best advice.
