It’s almost a given that no one in the world enjoys paying tax – especially not at the high rate. With prices constantly changing, farming is such a volatile business; it can be hard to decide on a trading structure which best suits your enterprise.
What to consider
When dealing with tax issues within a farming enterprise, one is often advised to consider entering into a limited company trading structure. However, there are factors which could affect the feasibility of this, depending on your farm and financial set-up. Before you look into entering into a limited company, first answer these questions:
Am I currently paying into
a pension?Am I utilising my family’s full tax credits?Do I have enough of
a director’s loan?What is a director’s loan?
A director’s loan can be a stumbling block for a lot of farmers entering into a limited company. Firstly, let’s explain what it is:
When a farmer (the director) enters into a limited company, he or she generally loans the farm’s stock and machinery to the company as a director’s loan, with this money being owed back to the director over time. If the farm already has loans and creditors on its books, it is important to consider these when calculating the long-term strategy for the company and director’s loan.
Example
Take a farm with dairy stock worth €150,000 and machinery worth €100,000. The director (farmer) would sell this stock and machinery to their company, but as the company is only starting up, it will have no cash to pay this off straight away. For this reason, it enters the books as a director’s loan of €250,000; owing to the director tax-free. If, in this instance, the farm has no current debt, the farmer is owed back €250,000 from the company tax-free over the coming years.
However, if the farm had debt of €100,000, this would be taken into account when calculating the long-term strategy of the director’s loan. If the debt was €100,000 and the farmer enters into a limited company, the company would usually begin paying back the debt on behalf of the farmer - which would, over time, reduce the director’s loan of the farmer.
*The only way that this would not be reduced is if the farmer was to take a wage from the company and use this money to pay down the loans held personally.
Other considerations
A director’s loan can also backfire if a farmer has more debt than the value of their stock and machinery.
Example
A farmer has €250,000 worth of debt and €150,000 worth of stock and machinery. In the long term, the farmer would end up owing the company €100,000 and would have to pay this back.
A way to build up a director’s loan is to sell land or buildings, however, there are a lot of tax issues attached to these including succession, stamp duty and capital gains tax. There are also legal fees attached to selling land or buildings to the company for when you would have to engage a solicitor.
Getting the right advice
The above stumbling blocks are partly why I would stress speaking to your accountant about the long-term viability of your company before starting the paperwork. If it doesn’t work on paper, it often won’t work in the real world. That said, it must also be considered that ‘paper never refused ink’, so personal circumstances may come into effect, too.
Company structures can appear daunting, but with the right people helping you make these decisions it can be a seamless process. A good advisor, accountant and solicitor are the key to you making the right decision for your farm and there are certainly other factors to consider besides tax. It is important to explore all of your options before making a decision.
1. Pension
Paying into a pension is an easy way to get more bang for your buck. First, it will reduce your tax bill, and second, it is a future sum of money ready for you when you retire.
Example
You have been paying €15,000 in tax every year - €10,000 at the lower rate of 20%, and €5,000 at the higher rate 40-50%. If you were to pay €5,000 into a pension fund, it is tax deductible, resulting in your tax liability reducing to approximately €12,500, along with putting a retirement fund in place for yourself for the future. This may seem small, but if you are paying larger tax liabilities or don’t have any retirement fund it could be very beneficial in the long run.
2. Tax credits
Utilising your family’s full tax credits is another simple but effective solution to your tax bill. Lots of children work on family farms; often with intermittent or untracked payments. This relaxed form of payment may seem like the easy option, but if your child works on the farm they are entitled to pay. By adding them to the payroll, it can work out for both you and your child when it comes to tax.
Example
A son or daughter employed full time on the farm is entitled to their own personal tax credit, along with the employee credit, which will enable them to earn up to €16,500 per annum - or €317 per week – tax-free. If the farm is a sole trader, the son or daughter will not be liable to PRSI, but will be liable to USC for income earned over €13,000.
This could be a huge tax saving for the farm and it will also reward the child for their hard work on the farm. It is important to discuss this option with your accountant, as there are different allowable work hours depending on the child’s age and the time of year.
Jerry O’Neill is a qualified ACCA accountant based in Bandon, Co Cork. If you have a query for Jerry, email advice@farmersjournal.ie
Read more
My partner wants to expand the farm: what do I need to consider?
Drawings from the farm- How to get a handle on them
It’s almost a given that no one in the world enjoys paying tax – especially not at the high rate. With prices constantly changing, farming is such a volatile business; it can be hard to decide on a trading structure which best suits your enterprise.
What to consider
When dealing with tax issues within a farming enterprise, one is often advised to consider entering into a limited company trading structure. However, there are factors which could affect the feasibility of this, depending on your farm and financial set-up. Before you look into entering into a limited company, first answer these questions:
Am I currently paying into
a pension?Am I utilising my family’s full tax credits?Do I have enough of
a director’s loan?What is a director’s loan?
A director’s loan can be a stumbling block for a lot of farmers entering into a limited company. Firstly, let’s explain what it is:
When a farmer (the director) enters into a limited company, he or she generally loans the farm’s stock and machinery to the company as a director’s loan, with this money being owed back to the director over time. If the farm already has loans and creditors on its books, it is important to consider these when calculating the long-term strategy for the company and director’s loan.
Example
Take a farm with dairy stock worth €150,000 and machinery worth €100,000. The director (farmer) would sell this stock and machinery to their company, but as the company is only starting up, it will have no cash to pay this off straight away. For this reason, it enters the books as a director’s loan of €250,000; owing to the director tax-free. If, in this instance, the farm has no current debt, the farmer is owed back €250,000 from the company tax-free over the coming years.
However, if the farm had debt of €100,000, this would be taken into account when calculating the long-term strategy of the director’s loan. If the debt was €100,000 and the farmer enters into a limited company, the company would usually begin paying back the debt on behalf of the farmer - which would, over time, reduce the director’s loan of the farmer.
*The only way that this would not be reduced is if the farmer was to take a wage from the company and use this money to pay down the loans held personally.
Other considerations
A director’s loan can also backfire if a farmer has more debt than the value of their stock and machinery.
Example
A farmer has €250,000 worth of debt and €150,000 worth of stock and machinery. In the long term, the farmer would end up owing the company €100,000 and would have to pay this back.
A way to build up a director’s loan is to sell land or buildings, however, there are a lot of tax issues attached to these including succession, stamp duty and capital gains tax. There are also legal fees attached to selling land or buildings to the company for when you would have to engage a solicitor.
Getting the right advice
The above stumbling blocks are partly why I would stress speaking to your accountant about the long-term viability of your company before starting the paperwork. If it doesn’t work on paper, it often won’t work in the real world. That said, it must also be considered that ‘paper never refused ink’, so personal circumstances may come into effect, too.
Company structures can appear daunting, but with the right people helping you make these decisions it can be a seamless process. A good advisor, accountant and solicitor are the key to you making the right decision for your farm and there are certainly other factors to consider besides tax. It is important to explore all of your options before making a decision.
1. Pension
Paying into a pension is an easy way to get more bang for your buck. First, it will reduce your tax bill, and second, it is a future sum of money ready for you when you retire.
Example
You have been paying €15,000 in tax every year - €10,000 at the lower rate of 20%, and €5,000 at the higher rate 40-50%. If you were to pay €5,000 into a pension fund, it is tax deductible, resulting in your tax liability reducing to approximately €12,500, along with putting a retirement fund in place for yourself for the future. This may seem small, but if you are paying larger tax liabilities or don’t have any retirement fund it could be very beneficial in the long run.
2. Tax credits
Utilising your family’s full tax credits is another simple but effective solution to your tax bill. Lots of children work on family farms; often with intermittent or untracked payments. This relaxed form of payment may seem like the easy option, but if your child works on the farm they are entitled to pay. By adding them to the payroll, it can work out for both you and your child when it comes to tax.
Example
A son or daughter employed full time on the farm is entitled to their own personal tax credit, along with the employee credit, which will enable them to earn up to €16,500 per annum - or €317 per week – tax-free. If the farm is a sole trader, the son or daughter will not be liable to PRSI, but will be liable to USC for income earned over €13,000.
This could be a huge tax saving for the farm and it will also reward the child for their hard work on the farm. It is important to discuss this option with your accountant, as there are different allowable work hours depending on the child’s age and the time of year.
Jerry O’Neill is a qualified ACCA accountant based in Bandon, Co Cork. If you have a query for Jerry, email advice@farmersjournal.ie
Read more
My partner wants to expand the farm: what do I need to consider?
Drawings from the farm- How to get a handle on them
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