Possibilities and contradictions in the calculation of the flat rate of the Value Added Tax Special Scheme for farmers in the European Union based on the Estonian example

P. Zeiger¹, A. Nurk², J. Lehtsaar³ and R. Värnik⁴

¹Estonian University of Life Sciences Institute of Economics and Social Sciences,Kreutzwaldi 1, 51014 Tartu Estonia; e-mail: peedu.zeiger@emu.ee
²Her Majesty’s Treasury; Budget, Tax and Welfare Directorate; International IndirectTaxes Team, 1 Horse Guards Road, London SW1A 2HQ United Kingdom;e-mail: aili.nurk@hm-treasury.gsi.gov.uk
³Estonian University of Life Sciences Institute of Economics and Social Sciences,Kreutzwaldi 1, 51014 Tartu Estonia; e-mail: jyri.lehtsaar@emu.ee
⁴Estonian University of Life Sciences Institute of Economics and Social Sciences,Kreutzwaldi 1, 51014 Tartu Estonia; e-mail: rando.varnik@emu.ee

Abstract:

The current article deals with the application of the optional flat rate value added tax (hereinafter referred as VAT) scheme for farmers (VAT special scheme, special scheme, special flat-rate) in the member states of the European Union. In the flat rate VAT scheme, farmers are not registered as taxable persons liable for VAT; therefore it is not possible for the farmers to deduct the VAT paid on their inputs from the VAT payable on the supply of agricultural products. To compensate the VAT paid on inputs, the farmer adds the flat rate VAT to the taxable amount of his supply.The research results suggest that it is not currently justified to apply the special flat rateVAT scheme in Estonia. In the case of the continuation of subsidies payable to farmers it is necessary, based on the Estonian example, to make an amendment to the directive which would also allow the subsidies to be included in the amount of income in the calculations of the special flat rate. By applying the current provisions of the directive, the calculation of the special flat rate would result in a flat rate that would give rise to over-compensation in the agricultural business sector.

Key words:

farmer, flat rate scheme, methods of calculation, value added tax

Expedience of differentiation of the value added tax rate imposed on foodstuffs in Estonia

P. Zeiger, J. Lehtsaar and Ü. Kerner

Institute of Economics and Social Sciences, Estonian Agricultural University, Kreutzwaldi 64, 51014 Tartu, Estonia; e-mail: zeiger@eau.ee

Abstract:

Changing the principles of imposing income tax and cutting down the rate of value added tax imposed on food has been discussed in Estonia during the last years. The possible impact of reduction of the value added tax rate, imposed on foodstuffs, on the disposable income of Estonian households was analysed for the period 2002-2003. Households were distributed into five income groups, and the effect arising from discussed changes in the value added tax was calculated for all income groups. In order to compare it with the result of VAT differentiation, the impact of linking of the basic exemption rate and gross minimum wages to the income of households was analysed as well. Due to the insignificant impact on the disposable income of households, a proposal to reduce the rate of value added tax imposed on food is not well-grounded and there is no justified need to drop it from current 18% to 5%.

Key words: