As a group, farmers who are not registered for VAT are compensated for the VAT borne on their farming inputs in accordance with a special mechanism provided for in the EU Sixth VAT Directive. The current flat rate of VAT refund provided for under this mechanism is 3.6 per cent.
The provisions of the Sixth VAT Directive specifically rule out using the flat rate scheme for any purpose other than to compensate farmers for the VAT borne on farm inputs. As the provision of self-catering cottages is not farming, the flat rate scheme cannot be used to allow recovery of VAT. The Directive would also rule out direct recovery of VAT inputs on holiday accommodation — such as applies in the case of farm buildings — other than through the normal VAT system, which involves registration for the purpose of charging the tax.
Where farmers engage in the business of providing holiday accommodation, they must register and charge VAT if the turnover from such business exceeds the annual threshold of £20,000. However, like any other business, such persons have the option to register even if the turnover is below this threshold.