AHDB’s operating budget has received a further blow after HMRC ruled it could no longer recover VAT on the goods and services it purchases on behalf of levy payers.
In a strongly worded statement, the change was described as “inexplicable” and “infuriating” by AHDB chair Nicholas Saphir this week.
It is due to take effect from 1 April, and means AHDB, to its “intense frustration and disappointment”, in effect loses £4m in funds – representing 9% of its £45m annual budget.
Since its creation in 2008, AHDB has been able to charge VAT on levy invoices and claim back the 20% VAT rate on a raft of goods and services bought on behalf of the food producers that pay the statutory levy that funds it. This includes costs such as marketing via external agencies, IT, stationery and energy costs.
But after HMRC recategorised the levy as a “non-business transaction”, AHDB will no longer be able to claim back the VAT, and will effectively have to pay an additional 20% for the aforementioned goods and services.
It said it had been informed by HMRC over plans to change its status in October 2020, and had since been “arguing hard” – with the backing of Defra – against the HMRC decision, and pushing for a formal review through the tax body’s internal appeal process.
AHDB said it had waited until this week to announce the changes as it continued “to press our case”. But with no sign of a change of heart from HMRC “we must now notify levy payers and the processors and auction marts who collect the levy on our behalf, so they can be ready for the change on 1 April”, it added.
The blow follows the announcement of a £7.8m cut to its budget last July after growers voted to ditch the levy in the horticulture and potato sectors – leading to a round of redundancies at the body.
AHDB’s already reduced 2022/23 budget had now been “recalculated”, added Saphir, with an expected reduction in its ability to service levy payers coming at a “time of such change and uncertainty being faced by farmers”, he pointed out. “I have no doubt many will wish to express their feelings directly to ministers at the Treasury.”
The Treasury, Defra and HMRC were all approached for comment. HMRC responded by saying it did not comment “on the affairs of individual taxpayers”, but noted public bodies were “subject to the same basic VAT rules as other taxpayers and HMRC will act to correct mistakes whomever the taxpayer may be”.
In the meantime, AHDB has said it has applied to HMRC to be included as a ‘section 33’ body entitled to recover some elements of VAT in relation to its non-business activities, which could somewhat reduce the impact of the changes.
However, the work towards section 33 recognition – in parallel with a possible appeal through a tax tribunal – had “no guarantee of success”, Saphir warned. And failure to implement HMRC’s decision would lead to “penalties”.
It comes at an uncertain time for AHDB. As part of a shift away from what Defra last week described as a “one size fits all” approach to its levy structure, votes will soon take place on the future funding arrangements of the remaining sectors the body is involved in, such as dairy and beef & lamb. Levy payers also have the ability to trigger votes to further abolish AHDB’s existing levies, which could ultimately place the long-term future of the organisation in doubt.
In a comment piece published in The Grocer last month, AHDB CEO Tim Rycroft insisted the body offered considerable value for the entire food chain, using its funding for generic marketing campaigns, opening up export markets, projects to boost supermarket sales of British produce and a variety of research and development projects to be a “critical enabler for farming success”.