Revenue Commissioners' farm VAT investigation continues

The Revenue Commissioners will shortly undertake audit type examinations of growers, such as poultry farmers, to establish if there is still a systematic excess of flat-rate addition payments over VAT on input costs, when account is taken of the recent changes implemented by co-ops in the sector, writes Stephen Cadogan.

This follows the industry abandoning some activities likely to give rise to overcompensation of growers for their VAT costs.

“However, there is still scope for over-compensation through the use of contractual pricing arrangements and contra supplies between processors and growers,” said Finance Minister Paschal Donohoe in the Dail.

He said, “It would serve the industry well to examine if the pricing structures they operate currently could result in overcompensation of growers for their input VAT costs, and to adjust them if this is the case.

“If the industry could provide empirical evidence that overcompensation is not arising at current price levels, or will not arise at new price levels to be implemented in the industry, it would remove the need for Revenue to proceed with its programme of interventions.”

Minister Donohoe warned he is committed to excluding the sector from the flat rate scheme if it proves necessary to do so. Replying in the Dail to a question from Fianna Fail on Finance spokesman Michael McGrath, Mr Donohoe said a business model emerged in the poultry sector that exploited the interaction of the normal VAT system and the flat-rate scheme, to engineer higher levels of flat-rate addition payments compared with the VAT borne on their input costs.

Paschal Donohoe

The model included the use of VAT-registered entities to recover VAT on costs borne on behalf of flat-rate farmers, while those farmers continued to benefit from applying the flat-rate addition to their supplies.

In addition, the contra supply arrangements in relation to growing services and feedstuff that are widespread in the industry could be manipulated to increase the price of the growing service and hence the flat rate addition payment.

Participants in the sector recognised and adopted structures and arrangements that had an obvious business rationale, and which were also likely to increase the level of flat rate addition payments to unregistered growers in the sector.

As a result, provision was made in the Finance Act 2016 to enable the Minister for Finance to exclude sectors from the flat rate scheme, where business structures or models employed result in a systematic excess of flat-rate addition payments over input costs borne by flat-rate farmers within that sector.

Revenue will deal with such sectors through the use of this provision.

Revenue also undertook a detailed examination of the business structures, models and contractual arrangements in place between parties within the sector.

Following this, co-ops undertook to recharge growers with all costs borne on their behalf plus VAT, thus addressing one of the mechanisms likely to result in overcompensation for flat-rate farmers.

Farmers are treated differently from other businesses for VAT purposes, in that they are not obliged to register for VAT when they exceed the turnover limit for registration.

The vast majority opt to remain unregistered, and are compensated by the flat-rate scheme which allows them add 5.4% to their prices when selling to VAT-registered businesses (for example, co-ops, meat factories, etc).

The VAT-registered business treats the flat-rate amount as a normal business input in its periodic VAT return, claiming input credit for the flat-rate amount paid to the flat-rate farmer.

In this way, farmers are compensated for the VAT borne by them on their input costs, and this simplification reduces the administrative burden for them as there is no need to register for VAT in order to recover VAT.

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