A little-known quirk of the VAT system is being blasted as a market distorting force which is giving a select few store cattle buyers a £60 advantage when bidding for cattle.
While few farmers have heard of the VAT Agricultural Flat Rate Scheme, those who have and are certified to use it, are able to be more bullish in the market place, leaving those on the normal full VAT reclaimable position at a distinct disadvantage, according to a disgruntled Aberdeenshire beef finisher.
“It definitely makes buying store cattle a lot more difficult when there are 'VAT farmers' in the same ring,” he said. “It just means those of us who are on the normal system have to pay that bit more than we would normally, and we have to travel to more markets to get cattle,” he said.
“I’ve known about the system for the past six or seven years, but it has been getting worse in the last two years as it has allowed these farmers to get bigger and bigger. The main problem is many accountants just ‘won’t touch the system’, thereby putting their clients at a distinct disadvantage compared to those who are on the system.”
Such is the amount of money involved in the flat-rate scheme payable to the farmer, that at least two court cases raised to challenge HMRC’s reluctance to accept the flat-rate scheme in recent months, have been successful in the farming business’ favour. The final challenge, as heard in the European Court of Justice, is that farmers had every right to subscribe to the offer of the flat-rate system and that HMRC were wrong to take the right away from them.
The flat-rate scheme – an alternative to VAT registration for farmers – basically means that those who are on it do not account for VAT, or submit returns and therefore cannot reclaim input tax. Instead, they are able to charge and keep a flat rate addition of 4% of the value of the goods they sell as a finished product, when selling them to VAT-registered customers. The flat-rate addition is not viewed as VAT, and was introduced by the EU as compensation for losing input tax on purchases.
At present, it is reckoned there are 1700 such farming traders using the system in the UK, which basically allows farmers to claim back 4% of the value of, for example, a finished animal. For a prime beef animal, this works out at £40-£60 per head. This is paid by deadweight buyers to the producer, with abattoirs then claiming back the money from HMRC. 
However, farmers on the flat-rate VAT scheme, are unable to claim back VAT on inputs, such as machinery or fertiliser, and so it is reckoned that it is only those who finish many thousands of cattle who benefit from the flat-rate scheme. Those who do, however, can be better off to the tune of six-figures, the Aberdeenshire farmer (who asked not to be named) told The Scottish Farmer.
The flat-rate VAT scheme can also be used by farmers in crop production, any type of stock farming, forestry and even fisheries. Guidance from HMRC does, though, state that they can refuse an application to be certified for flat-rate VAT if the farmer stands to gain more than £3000 in the year following an initial application, which was what raised the initial court proceedings – one of which was in England and the other in Northern Ireland.
The other big problem with the flat-rate system is few farmers and indeed industry leaders understand it. 
Scottish Beef Association chairman, Neil McCorkindale, “I am vaguely aware of the scheme of which my understanding was it was to benefit small producers or farms whose turnover fell considerably short of the VAT threshold. 
“It would appear that some large farms with the help of their accountants have managed to use it to the advantage of their business and the European court of Justice has ruled in their favour although this would appear not to be what the EU had in mind when it approved the scheme. The fact that some accountants are clearly advising their clients not to touch it speaks for itself,” said Mr McCorkindale.
Meanwhile, while having an extra £50-£60 per head to spend on store cattle is undoubtedly proving beneficial when prices for such animals are on the up, how long these values can be maintained is another topic for debate, when prime cattle values in Scotland again dropped on the week, albeit by less than in previous weeks.
Latest figures show deadweight steer values slipped less than 0.5p to 366.3p, with heifers falling 2.5p to 367.2p. Young bull prices were worst affected, dropping 10.6p to 325.4p, while cow values in contrast improved by 5.5p to 273.6p.
However, the tide may at last be turning as values for prime steers and heifers south of the Border improved by 2.8p and 2.0p to 352.4p and 355.7p per kg respectively, on the back of throughputs 20% down on the week, overall.
However, looking long term, with beef calf registrations up by 14,000head during 2017 compared to 2016, prime beef values are unlikely to rise that much in the near future.
Data from the British Cattle Movement Service show overall registrations for 2017 were down just 0.1% at 2,695,000 calves. It is the make up of these registrations that will make an impact on future beef values though, as dairy female numbers registered fell by 17,000 head – due to the fall in the milk price and a higher use of beef semen, compared with 2016.
In contrast, registrations of beef animals rose by 14,000 head, or 0.6%, to 2,200,000 head – almost making up for the loss in dairy animals. This rise suggests the increased supplies of prime cattle for slaughter expected in 2018 are likely to continue into 2019, according to AHDB.