248. Deputy Martin Kenny asked the Tánaiste and Minister for Finance the formula used for calculating the flat rate of tax for farmers; and the reason the flat rate changes from year to year while the livestock rate remains the same. [51138/26]

The VAT treatment of goods and services is subject to the requirements of EU VAT law with which Irish VAT law is obliged to comply. In accordance with the EU VAT Directive, farmers can elect to register for VAT or can remain unregistered.

Under VAT law, unregistered farmers can avail of the Flat-rate Farmers Scheme, an administrative simplification arrangement unique to the farming sector, which allows farmers to remain unregistered for VAT – thereby remaining outside the VAT system and avoiding the burden of registration and filing – and yet be compensated on an overall basis for the VAT incurred by such farmers in the course of their business. As is normal for VAT-unregistered businesses, unregistered farmers are not entitled to reclaim VAT incurred on the various individual inputs used in their farming business. However, the Scheme allows unregistered farmers to add and retain a percentage charge (known as the “flat-rate addition”) onto the amount they invoice VAT-registered businesses whom they supply with agricultural goods and services, in the course of their farming business. The flat-rate addition is not tax; it is an amount that unregistered farmers availing of the flat-rate scheme are permitted to charge on top of their selling price and to retain.

The flat-rate scheme is governed by Articles 295 to 305 of the EU VAT Directive and, as required under Article 296, the level of the flat-rate addition is reviewed annually by reference to macro-economic data for the preceding three years. The purpose of the review is to ensure that the flat-rate percentage in force continues to allow the unregistered farming sector to be fully compensated, on an overall basis, for the VAT it incurs across all its inputs. If the review indicates that the flat-rate percentage needs to be changed, then it is re-set under law in the Finance Act.

Using relevant data from the Central Statistics Office, the following formula is calculated each year:

Flat Rate % = (VAT Incurred by Unregistered Farmers on Inputs ÷ Agricultural Output of Unregistered Farmers) × 100

The figure for the input VAT is estimated by applying the relevant VAT rates to each expenditure category, and excluding the proportion attributable to VAT-registered farmers. This input VAT figure is then divided by the value of agricultural output of unregistered farmers, in order to produce the annual rate. The rate applied in legislation is a 3-year rolling average of the calculated annual rates.

In any given year, the review may result in an upward or downward change to the flat-rate addition, or it may leave the rate unchanged. In each case, however, the percentage applied is the one shown to give the unregistered farming sector full compensation for its input VAT, as allowed by the Directive. Overcompensation is not allowed under the Directive.

The Deputy is also asking about the livestock rate of VAT. As permitted by the EU VAT Directive, Ireland applies a super-reduced rate of 4.8% to the supply of livestock by a VAT-registered business. In this regard, livestock means live cattle, sheep, goats, pigs and deer, and horses normally intended for use in the preparation of foodstuffs or in agricultural production. A VAT-registered business that supplies livestock is obliged to account for the VAT on the sale in the normal way as part of its regular VAT return. Unlike the flat-rate addition, Ireland is not required under the Directive to review the livestock rate of VAT annually, and the super-reduced rate of 4.8% has been in place for many years.

By design, the flat-rate percentage ensures that unregistered farmers continue to be compensated on an overall basis for the VAT incurred across the complete range of the inputs. The formula takes account not only of the inputs taxed at the livestock rate of 4.8%, but also those taxed at the VAT standard rate of 23%, the reduced rate of 13.5%, the second reduced rate of 9%, and those subject to the VAT zero rate. Where any of those VAT rates are changed, the formula ensures that there is a direct follow-through into the calculation of the flat-rate percentage. Therefore, the formula used ensures that the flat-rate calculation fully reflects, on a continuing basis, the actual VAT exposure of the flat-rate farming sector.