Ireland 
USA AHDB levies to fall outside the scope of VAT
The Agricultural and Horticulture Development Board (AHDB) announced HMRC has ruled that with effect from 1 April 2022 their levies fall outside the scope of VAT. How will this impact the AHDB and why does this matter?
Who are the AHDB?
The AHDB is the body responsible for raising levies from farmers in particular sectors. The levies raised are ringfenced for the benefit of that given sector. The levy rates are approved by ministers on an annual basis.
What does ‘outside the scope of VAT’ mean?
The criteria for a transaction to fall within the scope of VAT are defined in the VAT Act. Transactions that fail to meet all of the conditions listed below are considered ‘outside the scope of VAT’:
- It is a supply of goods or services
- The place of supply is in the UK
- The supply is made by a ‘taxable person’
- The supply is made in the course of furtherance of business carried on by that taxable person.
Unless specifically provided otherwise, supplies meeting the conditions above will be subject to the standard rate VAT.
What has changed?
The levies charged have always been applied with VAT at the standard rate (currently 20%). From 1 April 2022, the VAT charge has been removed.
Surely the VAT charge being removed from the levy will result in a direct saving of that 20% charge?
The UK VAT system is operated with a view to the final consumer suffering the charge. Businesses registered for VAT are required to account for VAT on their taxable supplies, and in turn can recover VAT incurred on their costs, subject to the normal rules.
What does this mean for the typical farmer?
Farmers are registered for VAT due to the provision of taxable supplies. VAT is accounted for on the supplies made (often zero rated) and are able to recover the VAT suffered with a ‘direct and immediate’ link to the taxable supplies made.
On the face of it, this change will have no impact on the typical farmer – they are no longer paying VAT on the levy, so will no longer reclaim the VAT on its VAT return . If anything, it will represent a cash flow benefit with no delay between the point of cost being incurred and the point of recovery.
How will this impact AHDB?
Prior to 1 April 2022, the levies charged by the AHDB were considered standard rated supplies for VAT. Much like any other business, this entitled them to recover the input VAT incurred with the aforementioned ‘direct and immediate’ link to those taxable supplies.
Moving forward, costs incurred by AHDB in charging the levies will no longer be recoverable. In an article published on their website, they estimate this will result in additional (irrecoverable VAT) costs of up to £4million per annum.
Is it possible that an expenditure increase of this magnitude may be passed on to the levy payers in the medium or long term? In the article, the AHBD Chair, Nicholas Saphir remarked “this decision will punish levy payers at a time of considerable farming need. It is inexplicable”.
Any increase in the levies will result in a net cost to farmers.
The levies for 2022/23 were published on 1 April 2022 and remain unchanged from those charged in 2021/22.
The AHDB has confirmed that it continues to dispute HMRC’s decision but are required to implement their decision or face compliance penalties. They have made an application to be treated as a ‘section 33 body’. The grant of this status would allow for recovery of VAT on certain non-business expenditure.
The AHDB has encouraged levy payers to express their feelings directly to ministers at the Treasury.
Perhaps the small ‘silver lining’ in such circumstances would be the deductibility of such costs from the farmer’s income tax or corporation tax bill. Such a deduction is available where costs are incurred ‘wholly and exclusively’ for the purposes of the trade.
How can we help?
For the time being, farmers need to sit tight and await the result of any appeals the AHDB make to HMRC.
At a time where inflation has hit a 40 year high, businesses and individuals alike face a growing need to ensure costs are kept to a minimum. Businesses need to ensure they submit accurate VAT returns to avoid unnecessary costs and penalties.
We provide tailored VAT advice to many businesses within the agricultural sector. If you would like us to review your VAT position and ensure your business recovers all the VAT it is entitled to, then we would be happy to help.
We place the power of good advice into your hands and have experts in every field so please do get in touch if we can assist you with your tax queries.
Whilst considerable care has been taken to ensure the information contained within this document is accurate and up to date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.
Prevailing tax rates and reliefs depend on individual circumstances and are subject to change.
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