Flat-rate scheme for farmers

What it means

The flat-rate scheme for farmers is a special VAT regime the EU Directive allows for small farmers. The farmer does not register as a VAT payer and does not deduct input VAT; instead the buyer adds a flat-rate compensation to the price, which offsets the VAT the farmer paid on purchases.

The Directive offers the scheme as an option, not an obligation. Whether and how a state introduces it is up to its national VAT law, so the eligible farmers and the compensation rate differ from country to country. Some states use it widely, others have not introduced it at all.

A buyer who is a VAT payer can deduct the compensation paid on terms similar to ordinary VAT. The scheme thus mimics VAT neutrality without forcing a small farmer to keep VAT records, file returns and deal with input VAT deduction.

How it works in practice

A Slovak company mostly encounters the scheme when buying agricultural produce from farmers in other member states that apply it. The farmer's invoice or document then shows a flat-rate compensation instead of VAT, and the buyer must know how to book it and whether it may be deducted.

When buying from a foreign farmer under the flat-rate scheme, an intra-EU acquisition of goods is usually not reported as it would be for a supply from a VAT payer, because the farmer is not registered. The right treatment depends on the supplier's status, so ask for confirmation of their regime.

In Slovak practice domestic farmers usually follow the general VAT rules: once turnover exceeds the threshold they register under section 4, charge VAT and deduct input tax. With investments in machinery and buildings this tends to pay off, because excess deductions arise.

What to watch out for

The flat-rate compensation is not VAT in the strict sense and follows different documentation rules. If a buyer deducts an amount without a proper document, or from a supplier who does not qualify for the scheme, the tax authority may refuse the deduction and assess the difference with interest.

The rules change between states, and the EU pushes to stop the scheme from overcompensating farmers. Before a long-term contract with foreign farmers it is sensible to check the current position in their country and agree who bears the risk of a change.