Most farmers are currently not registered for VAT.

But they can use the VAT Flat Rate Scheme, which is designed specifically for farmers who are not registered - or are not required to register - for VAT.

In response to a question raised by the Sinn Féin TD Martin Kenny, the Tánaiste and Minister for Finance, Simon Harris, outlined the formula used for calculating the flat rate of tax for farmers.

The minister also detailed the reason the rate changes from year to year while the livestock rate remains the same.

Can farmers elect to register for VAT?

The Tánaiste outlined that the VAT treatment of goods and services is subject to the requirements of EU VAT law with which Irish VAT law is obliged to comply. 

In accordance with the EU VAT Directive, farmers can elect to register for VAT or can remain unregistered.

"Under VAT law, unregistered farmers can avail of the flat-rate farmers scheme, an administrative simplification arrangement unique to the farming sector," the Tánaiste outlined.

This allows farmers to remain unregistered for VAT - thereby remaining outside the VAT system and "avoiding the burden of registration and filing", yet being compensated on an overall basis for the VAT incurred in the course of their business.

What is the flat-rate addition?

Unregistered farmers are not entitled to reclaim VAT incurred on the various individual inputs used in their farming business, Minister Harris explained.

"However, the scheme allows unregistered farmers to add and retain a percentage charge (known as the flat-rate addition) onto the amount they invoice VAT-registered businesses whom they supply with agricultural goods and services, in the course of their farming business," he added.

The flat-rate addition was 5.1% in 2025. In Budget 2026, it was announced that the farmer's flat-rate addition would fall to 4.5% from January 1 this year.

Why is the flat rate reviewed annually?

The scheme is governed by Articles 295-305 of the EU VAT Directive.

It is required under Article 296 that the level of the addition is reviewed annually by reference to macroeconomic data for the preceding three years.

The Tánaiste said: "The purpose of the review is to ensure that the flat-rate percentage in force continues to allow the unregistered farming sector to be fully compensated, on an overall basis, for the VAT it incurs across all its inputs.

"If the review indicates that the flat-rate percentage needs to be changed, then it is reset under law in the Finance Act."

How is the formula calculated each year?

Using relevant data from the Central Statistics Office, Harris outlined that a formula is calculated each year:

Flat rate percentage = (VAT incurred by unregistered farmers on inputs ÷ agricultural output of unregistered farmers) × 100

The figure for the input VAT is estimated by applying the relevant VAT rates to each expenditure category, and excluding the proportion attributable to VAT-registered farmers.

This input VAT figure is then divided by the value of agricultural output of unregistered farmers, in order to produce the annual rate.

The rate applied in legislation is a three-year rolling average of the calculated annual rates.

Does the rate fluctuate?

The Tánaiste said that in any given year, the review may result in an upward or downward change to the flat-rate addition, or it may leave the rate unchanged.

"In each case, however, the percentage applied is the one shown to give the unregistered farming sector full compensation for its input VAT, as allowed by the directive," he said.

"Overcompensation is not allowed under the directive."

Is there a different rate for livestock?

As permitted by the EU VAT Directive, Ireland applies a super-reduced rate of 4.8% to the supply of livestock by a VAT-registered business.

The Tánaiste explained: "In this regard, livestock means live cattle, sheep, goats, pigs and deer, and horses normally intended for use in the preparation of foodstuffs or in agricultural production.

"Unlike the flat-rate addition, Ireland is not required under the directive to review the livestock rate of VAT annually, and the super-reduced rate of 4.8% has been in place for many years."