Making VAT digital for farming businesses

Making VAT digital for farming businesses

For many VAT registered businesses in the agricultural sector, calculating the VAT due can be a complicated matter and the business needs to understand the VAT treatment of each of its supplies (trading activities) as this may impact the recoverability of input VAT. While farming activity is a standard rated supply, this is particularly relevant as agricultural businesses diversify, e.g. to start holiday or long term residential lets.  It is also important to understand whether land, buildings or indeed wayleaves have been opted to tax as this may impact input VAT recovery.  Please speak to your local advisor if you’d like more information on this.

Once you’ve understood each of your supplies, it’s important to ensure your accounting software is working for you to make pulling out the data as straight forward as possible for the partial exemption calculation.  Most accounting software packages have a tracking option, sometimes known as departments. Setting up a tracking option for each of your supplies not only helps with the VAT return work, it should also allow the accounting software to run a profit & loss account for each supply so you can monitor how profitable each is.

Most accounting software packages come with standard VAT codes in the system however they should also allow you to add further ones in. For our diversified clients, we add in extra codes so it’s easy to see which VAT pot a transaction relates to, e.g. a direct farming cost may be 20% standard rated, while a cost relating to long term residential lets could be 20% exempt and professional fees such as your accountant’s fee are generally 20% non-attributable. Further codes can of course be set up if say you are able to claim VAT amounts at 5%, etc.

At Azets, we use Xero, online accounting software, however many of our clients use packages such as Farmplan, Quickbooks or Sage to name a few. The software package you use will depend on your needs and the functionality you need from it. 

As the VAT return reports generated on the software don’t always give the full detail needed for checks, for the VAT return work perspective, and using Xero’s reporting as an example, once the transactions are input allocating a tracking option and relevant VAT code to them, Xero is able to produce a detailed transaction report for the period which shows the full transaction details including the tracking category & VAT rate used.

This makes it quick and easy to check that the expected VAT rates have been applied. So for example, with a tracking option of say Sheep, if an invoice for sheep feed had a 20%  non attributable VAT rate applied, it’s easy to see this doesn’t seem right and can then be investigated and amended.

At this point, we gain comfort that the transactions included under each VAT coding heading on the face of the VAT report should be right and the totals of each of these can easily be lifted off the VAT report for inputting into the partial exemption calculation.

We work with our clients to assess the VAT treatments for each supply and are able to prepare a handy ‘cheat sheet’ for reference as the transactions are being posted. If you’re unsure of whether you’re applying the right VAT treatments, should be preparing a partial exemption calculation or if your current software licence is coming to an end or it just isn’t working for you any more, please do get in touch with your local advisor and we’d be happy to advise further.