What do UK Farmers need to know about VAT?
What do UK Farmers need to know about VAT?
Whether you’re a smallholder or running a large agricultural enterprise, understanding how VAT affects your farming business is key to staying compliant — and potentially saving money. This blog provides insights on the essentials of VAT for farmers in the UK.
Should you register for VAT?
You must register for VAT your taxable turnover exceeds £90,000 (2025 threshold) in any rolling 12-month period. Taxable turnover includes any sales that would be classed as zero, reduced or standard rated, exempt sales do not count towards this threshold.
What about voluntary registration?
You can choose to register below the taxable turnover threshold if you are or are intending to make any VAT taxable supplies.
This can be beneficial if you regularly buy goods and services that include a VAT charge (e.g. machinery) and the VAT on the goods and services is more than any VAT you would need to charge on sales if VAT registered.
For many businesses in this sector many sales would be classed as zero rated. This means they are taxable supplies so allow a business to register for VAT, but 0% VAT is charged on the supply which normally results in a refund of the VAT spent on goods and services.
What VAT Rate Applies to Your Sales?
Below are some examples of common sales made in the sector and the VAT rates applicable:
|
Activity |
VAT Rate |
|
Sale of most raw food, cereals, livestock (intended for human or animal consumption) |
0% (zero-rated) |
|
Sale of processed food (e.g. cheese, ice cream) |
Standard 20% |
|
Agricultural contracting services (e.g. ploughing, harvesting for others) |
Standard 20% |
There is also potential to making VAT exempt supplies, examples include residential property lets or letting on non-residential property with no option to tax
Exempt supplies, unlike zero rated supplies, in general do not allow for VAT recovery on related costs unless you opt to tax the land or the VAT on the associated costs are below certain levels. For more information, please see our guide to partial exemption for businesses that make both taxable and exempt supplies on https://www.lewisbrownlee.co.uk/understanding-partial-exemption-for-vat/
This is a tricky area so advice should be sought.
Input VAT: What Can You Reclaim?
You can usually reclaim VAT on the below where VAT has been correctly charged by the supplier:
- Machinery and vehicles used in the business (but not most cars)
- Animal feed and veterinary products
- Fertilisers, sprays, and seeds
- Fuel and electricity used for business purposes
- Repairs and building materials for barns or sheds
You cannot reclaim VAT on:
- Private household expenses
- Non-business activities
- Most cars (unless wholly for business, with strict conditions)
Mixed Use: Apportionment Rules
If you use things like fuel, electricity, or buildings for both business and private use, you must:
- Make a reasonable estimate of the business proportion
- Only reclaim VAT on the business part
Example: If a building is used 60% for livestock and 40% as a private garage, you can reclaim 60% of the VAT on maintenance costs.
Agricultural Flat Rate Scheme for Farmers (AFRS)
This is a variant of the flat rate scheme which is an optional scheme specifically designed for Framers with an annual turnover from farming activities below £150,000.
Rather than charging VAT on sales and reclaiming VAT on purchases, farmers on the scheme follow a simplified approach. They apply a flat-rate addition, currently 4%, to their qualifying sales to VAT-registered customers.
The AFRS is not VAT and the farmer is allowed to keep the 4% collected. The addition acts as compensation for the loss of input tax the farmer would have been able to reclaim if registered for VAT.
The scheme was introduced to help ease the administrative burden of 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. Under this scheme there is no requirement to submit returns to HMRC.
It is a condition of joining the scheme that farmers who are registered for VAT must have their registration cancelled and farmers cannot join this scheme if the value of their non-farming activities is above the VAT registration threshold (currently £90,000).
This scheme could be ideal for farmers with few input costs or minimal capital purchases.
Farm diversification – common activities and VAT
Holiday Accommodation (e.g. barn conversions, glamping pods)
- VAT Status: Standard-rated (20%)
- Input VAT: You can reclaim input VAT on related costs (e.g. building maintenance, marketing), provided the business is VAT-registered.
Farm Shops and Direct Sales
- VAT Status:
- Most food items: Zero-rated
- Hot food, alcohol, and catering: Standard-rated
- Non-food items (e.g. crafts): Standard-rated
- Implication: You’ll need to track sales by VAT rate and charge accordingly.
- Input VAT: Reclaimable on related costs.
Land and Property Rentals
- VAT Status:
- Residential: Exempt
- Commercial: Exempt by default, but you can opt to tax (making it standard-rated)
- Storage: Normally standard rated even without an option to tax
- Implication: Exempt supplies restrict input VAT recovery unless you opt to tax.
- Input VAT: Can become a cost unless structured properly.
It is vitally important to understand and implement the correct VAT treatment for your business. Getting the VAT treatment wrong can lead to costly errors, missed claims or penalties. If you’re planning a new diversification project—or simply want to check your current VAT setup is working for you we would be happy to help.
If you’d like to speak to one of our experts, please call 01243 782 423. Alternatively, please email us from our contact page and we will be in touch!
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