Farm Business Management Series: VAT in Farming

With news from HMRC that VAT recording via digital means (i.e. a software package), must be in place by April 2019 as part of the wider Making Tax Digital scheme, it’s important to start thinking about how you manage your VAT now and whether you will need to make changes going forward.

“Businesses (including self-employed and landlords), with a turnover over the VAT threshold, will be required to keep records of their income and expenditure digitally, and send VAT return details to HMRC directly from their software.” HMRC

To help you understand a little more about managing VAT for your farming business we’ve teamed up with Andrew Redman and Tim Maris at UHY Hacker Young to put together 3 steps to guide you through the types of records you need to keep and why, plus we’ve added in some top tips for making your life easier.

Step 1. What do you need to record?

Consider the type of records you need to keep for your farming business to manage VAT effectively, and to stay compliant with legal requirements. Tim says,

“The way in which HMRC expects taxpayers to keep records is changing, historically many business owners would have kept a box of paper invoices and remittances somewhere in their office or home. Moving forward HMRC are looking for arguably a more organised and definitely a more digitalised approach which involves the use of a computer accounting package.”

These include:

  • all invoices you receive (originals or electronic copies)
  • copies of all sales invoices you issue and self-billing invoices issued to you for grain, livestock and second hand machinery sales
  • sales and purchase credit notes
  • name, address and VAT number of any VAT registered suppliers and self-billing customers
  • a computerised report of all input and output VAT for each reporting period
    • records of all the zero-rated or VAT exempt items you buy or sell
    • import and export records
    • records of items you can’t reclaim VAT on – e.g. business entertainment or where the supply is exempt
    • details of any fuel scale charges for farm vehicles with business and private use
    • partial exemption calculations to prove reclaiming of input VAT below the ‘De Minimis’ on farming business with rental income supplementing the trade
  • details of any fuel scale charges for farm vehicles with business and private use

“The basis of the list above is vastly the same as it would have been before however the key difference is the inclusion of a VAT computerised report showing the breakdown of the headline figures within the monthly or quarterly VAT return. HMRC’s move towards a more digitalised record system is a step to improving the accuracy of VAT returns and therefore VAT collection. Having said this paper copies or electronic scans of the original documentation will still need to be kept so you can substantiate the VAT,” adds Andrew.

Sally Ashwell, Farmplan Product Coordinator says, “We often hear from our customers that an HMRC Inspector has called to check their records to make sure the right amount of VAT is being claimed. Therefore it’s essential you have a system in place that allows you to record and find your information easily.”

Mary Almond, a self-employed farm secretary adds, “I recently had a VAT inspection and the inspector was very impressed with the information I was able to give him straight away and the process of recording the detail. The VAT return audit is a good report for explaining how the VAT has been calculated for one particular quarter.

I was also asked to provide information about fixed assets, so I was able to use the Items Inspector function and found it very useful. We were able to provide information regarding particular assets using the itemised audit reports, which followed the full history of their purchase from the suppliers.”

Step 2: Choose a software solution that can help make your life easier

One problem faced by all business owners, including farms, is the amount of paperwork and records that need to be kept about business activities including VAT. These records need to be managed effectively so they can be interrogated and used for running VAT audits in the future.

“Paperwork is the bane of most farmers lives, albeit an essential part of managing a business. Records such as invoices, receipts and supplier details can easily become a pile of paper in the farm office. This is why it’s important to find a solution that will help you manage all these details in one place and is accountant friendly. With changes to VAT management coming soon, now is the ideal time to choose software that is compliant with the new HMRC scheme and farming friendly,” says Sally.

Here are Sally’s top 5 questions to ask of your accounts software package:

  • Can I input information and access it again easily when I need to?
  • Can I share my records with my accountant without having to print everything out?
  • Will the software continue to be compliant with HMRC’s Making Tax Digital scheme as it evolves?
  • What sort of support do I get with my software – who do I call if I need guidance on use
  • Will I be able to get useful management information using farming friendly terminology?

Step 3: Work with your accountant to improve VAT management

Using Farmplan’s Business Manager software Andrew adds, “Here at UHY Hacker Young we have several clients using Farmplan to record their businesses transactions and fully support the use of this software.
As such we have fully operational Farmplan licenses in our offices meaning most of what we need to enable us to prepare accounts for tax purposes can be sent via email in the form of a Farmplan backup. Alternatively with Farmplan’s remote data storage slots you can save a backup to the cloud and we can access it from there.
Following the receipt of the Farmplan backup we would then ask to see documentation of the transactions which require further investigation as well as the usual information such as bank statements and closing valuations etc.
If you want to be prepared for the changes to VAT choosing to obtain a licence for a Farmplan product would be a good start.”

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