Marian Harkin (Sligo-Leitrim, Independent)
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127. To ask the Minister for Finance the rationale for the decrease in the flat rate of VAT; and the likely impact on farmers. [51556/21]

Paschal Donohoe (Dublin Central, Fine Gael)
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The Flat-Rate Farmer’s Scheme is a long-standing arrangement under VAT law that allows farmers who remain unregistered for VAT purposes to be compensated on an overall basis for the VAT charged to them on their purchases of goods and services. The Scheme is designed to reduce the administrative burden for farmers and allows them to remain outside the normal VAT system thereby avoiding the obligations of registration and returns. The Scheme is governed by EU VAT law and the level of the “flat-rate addition” allowed under the Scheme is required to be reviewed annually. In the recent Budget I announced a reduction in the rate of the flat rate farmer’s addition from 5.6% to 5.5% with effect from 1 January 2022, and this is provided for in the Finance Bill 2021 that is currently before the House.

The annual review of the Scheme is conducted by reference to macro-economic data, for the preceding three years, on agricultural production and agricultural inputs and the deductible VAT element of such inputs. The proposed reduction in the flat-rate addition to 5.5% for 2022 is a result of calculations on the basis of macro-economic data received from the Central Statistics Office (CSO) for the three-year period 2019-21. The methodology takes account of the final estimates of farming inputs, outputs and the VAT rate structures for 2019 and 2020, and a provisional forecast of agriculture inputs, outputs in 2021 as provided by the CSO, and the VAT rate structure for 2022. The method of calculation of the flat-rate addition percentage is subject to audit by the European Commission.

The reason for the annual review requirement is that, while it has been normal practice to compensate unregistered farmers in full for VAT incurred, over-compensation is not permitted under EU law. The calculations under the most recent review show that full compensation can be achieved by decreasing the rate to 5.5%, and that this will have an estimated saving to the Exchequer of €7m in 2022. Thus, the Scheme will continue to provide full compensation to farmers using the Scheme following the proposed rate change on 1 January 2022.

Finally, the Deputy may be interested to know that, as an alternative to using the Flat-Rate Farmer's Scheme, it is open to a farmer to decide to register for VAT. A farmer who does this would be entitled to claim deductibility for the actual VAT incurred on all inputs into the farming business, in accordance with the VAT rules. Of course, the farmer would also be obliged to charge normal VAT on all the businesses supplies/sales, and to account for VAT regularly and submit regular VAT returns to Revenue.