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HMRC internal manual

VAT Food

Milk quotas

A milk quota is the maximum quantity of milk which a farmer may market in a year free of levy. Milk quotas were introduced in the EC and allocated to farms producing milk or other milk products on 2nd April 1984 in order to restrain rising milk production. They were introduced initially for a five year period, but this has subsequently been extended.

Quotas were allocated on the basis of a farmer’s holding. Farmers wishing to increase milk sales without paying levy must obtain (purchase or lease) additional quota from other quota holders. If a farmer acquires additional land to which quota is attached, a new holding is formed comprising of the original land plus new land, with enhanced quota.

Administration of milk quotas

Until 31st March 1994, responsibility for the administration of milk quotas in the UK lay with the Ministry of Agriculture, Fisheries and Food (MAFF). Up until that point, the Milk Marketing Boards (MMBs) acted for MAFF for the purposes of maintaining a register of quota held by each individual milk producer. One of the responsibilities of the MMBs was to check and process all transfer and leasing forms submitted by producers and to amend the quota register accordingly.

Following the dissolution of the MMBs in England, Wales and Scotland on 31st October 1994, and in Northern Ireland on 28th February 1995, overall responsibility for the administration of the milk quota system in the UK passed to the Intervention Board Executive Agency (IBEA) with effect from 1st April 1994. The IBEA is now known as the Rural Payments Agency (RPA).

The basic EC rules on milk quotas are contained in Council Regulation (EEC) 3950/92 and are given effect in the UK by the Dairy Produce Quotas Regulations 1994. From 1st April 1994, amendments to these regulations allow the transfer of quota without land in certain circumstances. This is derogation from the general principle of quota attached to land. There are now a number of ways in which quotas may be transferred, and the VAT treatment is different for each.

Transfer of quota without land

The supply or transfer of quota qualifies as a supply of services and is therefore standard-rated. Such transactions involving quota can be either:

  • sold outright; or
  • leased.

Sold outright: With effect from 1st April 1994, the sale of milk quota is a standard-rated supply of services.

Leased: Since 1st April 1986, farmers have been able to temporarily transfer quota through an in-year leasing arrangement from one producer to another, without a change in the occupancy of the land. The lease of the milk quota in these circumstances is liable to VAT at the standard rate. At the end of the year the quota reverts back to the original owner.

Transfer with land

Freehold disposal

When the transfer of milk quota is linked with a supply of land under one agreement, this is regarded as one supply for VAT purposes. The liability of the quota will follow the liability of the land: exempt, except where it is standard-rated when the supplier has elected to waive exemption. This applies even where separate identifiable sums are paid for the land and the quota, or if the invoice details are split between land and quota.

Leasehold transfer

The following are the most common types of lease that require quota to be transferred:

  • lettings protected under the Agricultural Holdings Act 1986;
  • lettings for more than one year but less than two years (often referred to as Gladstone v Bower arrangements);
  • fixed term tenancies under Section 3 of the Agricultural Holdings Act 1986;
  • short term lettings of between two and five years approved by the Minister under Section 5 of the Agricultural Holdings Act 1986;
  • short term lettings for a period of not more than 364 days approved by the Minister under Section 2 of the Agricultural Holdings Act 1986;
  • lettings for the purpose of grazing and/or mowing for some specified period of the year of not less than the minimum period of ten months in England and Wales, eight months in Scotland and twelve months in Northern Ireland; and
  • lettings under the Agricultural Tenancies Act 1995 (new lettings from September 1995 onwards).

A milk producer can therefore acquire an area of land together with the quota that flows with it; the land is subsumed within his holding, and the quota within the total available to him. He can then transfer the same land or part of it without quota attached if, in the interval, the land had not been used for milk production.

A set period of time of non-milk production must elapse before the quota becomes dissociated from the relevant area of land. This period has been set at ten months in England and Wales, eight months in Scotland and twelve months in Northern Ireland, both to allow proper registration and to be in line with the minimum period of a lease, as established by the regulations for quota transfers to take place. If the land is used for milk production within the various minimum periods of being transferred, then an apportionment of quota is required.

When the transfer of milk quota is linked with a supply of land under one agreement, this is also regarded as one supply for VAT purposes, however tenuous the lease / tenancy agreement appears to be. The liability of the quota will follow the liability of the land: exempt, except where it is standard-rated when the supplier has elected to waive exemption. This also applies even where separate identifiable sums are paid for the land and the quota, or if the invoice details are split between land and quota.

Transactions that do not transfer milk quotas

The current provisions mean that quota will not be transferred with the land when the land transfer is:

  • a licence to occupy land; or
  • a tenancy of less than a qualifying period.

Licence to occupy land

This is where the landlord does not grant exclusive rights of occupation, but reserves to himself, for example, the right to graze livestock on the land or to perform some other act of husbandry. Grazing rights (the right to allow someone else’s animals to graze on land - also known as grass keep lettings) are both the granting of a licence to occupy land and a supply of animal feeding stuffs (grass). In such situations, the supply of animal feed takes precedence over the supply of a licence to occupy, and the supply is zero-rated. The granting of a grazing licence and the simultaneous transfer of quota is seen as two separate supplies, one of grass (zero-rated) and one of quota (standard-rated).

A tenancy of less than a qualifying period

In England and Wales the period of occupation is ten months, in Scotland eight months and in Northern Ireland twelve months (or a conacre letting). The periods of occupation are different to reflect differences in farming practices.

Queries about milk quotas

If you have any queries you receive about the liability of these transfers should therefore be referred to the respective VAT Policy team (see VFOOD0280).

Transfers under milk outgoers schemes administered by MAFF

These are the Milk Supplementary Levy (Outgoers) Scheme (1984) and the Milk (Community Outgoers) Scheme (1987). They both involve surrender of quota to MAFF in return for payment based on profits forgone, value of quota, or both. In 1992, Treasury Ministers gave a clear commitment that there would be no question of introducing VAT on these payments, and they are therefore outside the scope. As there was little uptake of the schemes in the UK, the last outgoers schemes operated in the UK in 1988/89; and the last payments were made in 1994/95.

Compensation payments

Compensation on termination of the milk quota holding under the provisions of Schedule 1 of the Agricultural Act 1986 and under Section 60 (Notice to Quit) of the Agricultural Holdings Act 1986 is deemed to be outside the scope of VAT as the consideration is not for a supply. Payments in addition to the statutory amount (for example in return for the tenant vacating at an earlier date than allowed by the period of grace given in the notice to quit) are consideration for a supply, which will be exempt, unless the tenant has opted to tax.