The Agricultural Flat Rate Scheme (AFRS) allows farmers to charge a fixed levy of 4% on certain services to VAT registered customers. This 4% levy is not VAT and can be retained by the farmer; however, it can be reclaimed as though it were VAT by customers. In effect it is a government funded supplement that is intended to compensate farmers for the loss of an ability to reclaim VAT on expenditure. AFRS will apply to processing by a farmer of products derived from his own activities within the designated activities using only such means as are normally employed in the course of such activities. The full list of designated activities are in VAT Notice 700/46. Supplies of agricultural services by a person who also carries out one or more other designated activities falling within the designated activities above also falls within AFRS.
Farmers can use the AFRS as long as their income from non-farming sources does not exceed the VAT registration threshold – it does not matter that their farming income may exceed that limit.
If you’re already a flat rate farmer and your non-farming turnover goes over the threshold you must leave the scheme and register for VAT. But, you should also read paragraph 4.4 of the Agricultural Flat Rate Scheme (VAT Notice 700/46. If your non-farming turnover is above the threshold and you’re already registered for VAT, you must remain so.
If delivery cost is built into the normal sales price, VAT is accounted for on the value of the goods based on the liability of the goods themselves. Therefore, the 4% can include the total value of sales including delivery costs. This applies whether or not delivery is required under the contract. However, care should be taken to ensure there is no room for abusive actions which will invite HMRC to think that the delivery/transport service is a separate activity.