Agricultural Flat Rate Scheme

The Agricultural Flat Rate Scheme is a simplified alternative to standard VAT registration designed for farmers and certain agricultural producers. Instead of charging VAT and submitting returns, you charge a flat rate addition of 4% on sales to VAT-registered customers, which you keep as compensation for not being able to reclaim VAT on your purchases.

What is the Agricultural Flat Rate Scheme?

The Agricultural Flat Rate Scheme allows farmers to operate without VAT registration. Under this scheme, you don't submit VAT returns or reclaim input tax (the VAT you pay on purchases). Instead, you charge a 4% flat rate addition when selling goods, or goods and services, to VAT-registered customers.

This 4% addition is not VAT itself—it acts as compensation for the input tax you cannot reclaim. It's not intended to reimburse all the VAT you pay on purchases, but provides a simplified way to recover some of those costs without the administrative burden of VAT registration.

Who can join the scheme?

To be eligible for the Agricultural Flat Rate Scheme, you must meet several criteria:

Your business activities must qualify. You must be in business as a farmer supplying goods, or goods and services. You cannot join if you only supply services. "Farmer" is defined broadly for this scheme and includes various agricultural production activities (covered in detail below).

Your turnover must be below the entry threshold. Your annual turnover for farming activities must be below £150,000 when you apply. Once accepted, you can remain on the scheme until your annual farming turnover exceeds £230,000.

Your non-farming activities must be below the VAT threshold. If you have income from non-farming activities (such as letting holiday cottages), this must be below the standard VAT registration threshold. If you're currently VAT registered, you must cancel your registration to join the scheme.

You must have a clean VAT record. You cannot have been convicted of any VAT-related offence or penalised for VAT offences under Section 152 of the Customs and Excise Management Act 1979. You also cannot have been assessed for a penalty under Section 60 of the VAT Act 1994 in the three years before your application.

You must not have certain business structures. In the last 24 months, you must not have been eligible for VAT group registration, registered for VAT in the name of a division, or associated with another person.

Who cannot join the scheme?

You're excluded from the scheme if you:

• Have farming turnover exceeding £150,000
• Have non-farming turnover above the VAT registration threshold
• Primarily buy and sell animals (such as animal dealers or trainers)
• Are involved in activities "once removed" from farming, such as processing farm produce you didn't grow yourself—examples include dairy co-operatives that buy milk from farmers to produce dairy products, or sawmills processing timber from other sources

Which farming activities qualify?

The scheme covers four main categories of agricultural production:

Crop production includes general agriculture, viticulture, growing fruit, vegetables, flowers and ornamental plants (whether outdoors or under glass), production of mushrooms, spices, seeds and propagating materials, and nurseries that rear young plants for sale.

Stock farming covers general livestock farming, poultry farming, rabbit farming, beekeeping, silkworm farming, and snail farming.

Forestry includes growing, felling and general husbandry of trees in a forest, wood or copse, plus converting felled timber into sawlogs, industrial small diameter roundwood, pitprops, cordwood, fencing material and firewood.

Fisheries encompasses fresh-water fishing, fish farming, breeding of mussels, oysters and other molluscs and crustaceans, and frog farming.

Processing activities only qualify if you've grown the products being processed yourself. For example, if you grow trees, fell them and cut them into logs, this qualifies. Processing timber someone else has grown does not qualify.

Qualifying services include field work (reaping, mowing, threshing, bailing, collecting, harvesting, sowing and planting), packing and preparing agricultural products for market (including drying, cleaning, grinding, disinfecting and ensilaging), storage of agricultural products, stock minding, rearing and fattening, hiring out equipment, technical assistance, destruction of weeds and pests, dusting and spraying of crops and land, operation of irrigation and drainage equipment, and lopping, tree felling and other forestry services.

These services only qualify when they're linked to one of the main qualifying agricultural activities.

How to join the scheme

To apply, complete form VAT 98 (Flat Rate Scheme for Agriculture), available from HMRC. You can apply at any time, but your certificate will only take effect from the date HMRC receives your application. To ensure you're registered by your preferred date, you can apply up to 30 days in advance.

If you're currently VAT registered, your flat rate scheme certificate cannot take effect before your VAT registration is cancelled.

Allow up to three weeks for HMRC to process your application. They will either send you a certificate confirming when your membership starts, or explain why your application has been rejected.

Your certificate will show either:

• The full name and business address if you're a sole proprietor or company
• The trading name (if applicable) or names of at least two partners for partnerships, covering all partners named on the application form

How to charge the flat rate addition

When you sell goods, or goods and services, to VAT-registered customers, you charge your normal price plus a 4% flat rate addition. This 4% is not VAT and should not be described as such on your invoices.

You keep the entire flat rate addition—you don't pay it to HMRC. Because you're not VAT registered under this scheme, you cannot reclaim any VAT you pay on purchases or expenses.

You cannot charge the flat rate addition to non-VAT registered customers.

Should you join the scheme?

Even if you qualify for the Agricultural Flat Rate Scheme, you're not required to join. You can choose to remain VAT registered if you prefer.

The scheme is most beneficial if you sell mainly to VAT-registered customers and don't incur large amounts of VAT on purchases. If you buy significant amounts of goods and services with VAT, standard VAT registration might be more advantageous because you could reclaim all that input tax rather than receiving only the 4% compensation.

Sources

• Agricultural Flat Rate Scheme (VAT Notice 700/46)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.