While recognising that farm income will be down in 2016, farmers should not lose sight of the income or corporation tax position of the business.

Preliminary tax payments fall due over the next couple of months and awareness of your profit could lead to you paying the minimum amount of tax.

Proper tax planning can help to minimise cash extraction out of the business, thereby ensuring that the maximum amount of profits are retained. It is advisable to use the preliminary tax rules to the maximum.

Preliminary tax mechanism

Income tax

Income tax is paid on a current year basis – ie in 2016, you make a payment on account of your 2016 income tax liability using one of the following options to avoid penalties on underpayment:

  • Pay amount of 90% or more of the total tax that will eventually be due for 2016; or
  • An amount of 100% of the income tax bill for 2015 (ignoring EIIS/Film Relief).
  • An amount of 105% of 2014 income tax liability – Need to pay by direct debit.
  • In the current year, the use of the 90% of 2016 tax should be given serious consideration

    • Corporation tax

    The self-assessment system ‘pay and file’ applies to companies. The obligations of a company with regard to paying corporation tax and filing its return are as follows:

  • Compute and pay its preliminary tax liability by the specified date.
  • File its return of income (including audited accounts where applicable) within nine months of the end of the accounting period. If this date is after the 21st of the ninth month, the filing date is brought forward to the 21st of the ninth month or 23rd in the case of returns filed electronically (21/23 day rule).
  • Pay any balance of tax due when lodging the return – ie within nine months of the end of the accounting period, subject to the 21/23 day rule.
  • Special provision is made for small companies whose liability does not exceed €200,000 in the preceding chargeable period.

    • New or startup companies

    New or start-up companies with a corporation tax liability of €200,000 or less for their first accounting period will not be required to pay preliminary tax in respect of that first accounting period and will instead be required to pay their final corporation tax liability for that accounting period at the same time as they are required to submit their corporation tax return – ie within nine months after the end of the accounting period, subject to the 21/23 day rule referred to above.

    When is preliminary corporation tax due?

    For companies with a tax liability not exceeding €200,000 (in their previous accounting period) preliminary tax is payable in one instalment.

    Tax planning

    In considering tax planning, a practical approach is required. Ask yourself the following questions:

  • 1. What do I need within the farm gate that makes economic sense?
  • 2. Can I utilise tax allowances to minimise the cost of the expenditure?
  • 3. Can I afford same? Does cashflow/finances permit the expenditure?
  • 4. If I don’t need the investment, what alternatives do I have?

    • If the answer to points one to three is yes, the person should consider the following.

    On-farm considerations

  • Family wages – Can I pay wages to children who have made a commercial contribution to the farm? Ensure proper procedures are followed to get the deduction.
  • Can I claim expenses for repairs instead of capital expenditure?
  • Examine the add-backs in the adjusted profit for personal use of motor, ESB, etc.
  • Bring forward capital expenditure and ensure asset in use before your accounts year end.
  • Stock relief – Can I purchase extra stock and avail of stock relief of up to 100%?
  • Income averaging – Review use of averaging and examine the benefits.

    • Income averaging has been increased from three to five years. For the 2015 and 2016 tax years, transitional measures will apply.

    In order to opt-off income averaging in 2016, it will be necessary to have been on averaging for the four preceding tax years (2012 to 2015). On opting off, a look-back for these four years will be necessary.

    Off-farm

    One then needs to look at the off-farm options.

    Pension payments

    Payments to an approved personal pension scheme, subject to the percentage ceilings as set out in Table 1, are fully allowable against a farmer’s taxable profits from his farming business.

    Taxable farm profits would not include rental income, deposit interest etc. Since 2002 it is no longer necessary for earned taxable farming profits to continue to exist in order to receive a tax allowance for pension contributions.

    This may be of interest and relevant to certain Early Farm Retirement Scheme participants.

    Employment and Investment Incentive Scheme

    Employment and Investment Incentive Scheme (EII) (formerly Business Expansion Scheme Relief (BES)), is a euro-for-euro tax relief for investment in certain types of companies. The maximum amount which qualifies for the relief in any one year is €150,000.

    The scheme allows a tax deduction up to 30% of the qualifying investment and once a holding period for the shares subscribed for of three years has been reached, an additional tax deduction of 10% can be attained.

    However, the further 10% of tax relief will only be available at the end of the holding period provided the company concerned has increased its number of employees since the investment was made or the company has increased its expenditure on research and development.

    Film investment

    Special tax incentives are available for qualifying investments in the film industry. Tax relief is available at the 40% tax rate on 100% of an individual’s annual investment up to a maximum investment of €50,000 per annum and the return of your capital is not guaranteed.

    Ensure all credits claimed

    While it may seem with every budget that tax reliefs are getting scarcer, there are still some tax credits and reliefs out there that can help to reduce your tax bill:

  • Home carers credit.
  • Maximise the use of individualisation.
  • Incapacitated person – employing a carer/incapacitated child credit.
  • Artists exemption.
  • Deduction for maintenance payments.
  • Certain medical and dental expenses.
  • Home Renovation Incentive Scheme.

    • Revenue has a comprehensive list of tax credits and reliefs on www.revenue.ie

    Earned income credit

    A new credit has been introduced for all self-employed individuals.

    This credit is worth €550 for 2016 and it has been indicated that this is to increase in the coming years to match the PAYE credit of €1,650. An individual cannot claim both the earned income credit and the PAYE credit unless the combined claim for both is less than €1,650.

    Corporation tax

    When one considers the rate of tax at 12.5% in a company, individuals who enter companies often overlook tax planning.

    The retention of profits for the business and the extraction of tax-free money for the directors should always be under review.

  • Have you claimed the maximum in tax-free subsistence/expenses?
  • Pension payments – beneficial, but proper planning is required.
  • Benefits to directors – review the tax cost of any benefits take.
  • Tax credits are available for research, development and green energy investment – could this apply to you?
  • Review salary being extracted from the company?

    • Conclusion

    Tax planning and cash management relies on the proprietor being aware of the difference between profit and available cash.

    The distinction between them is huge and without knowing can lead to difficulties. Remember, profit must be able to support loan repayments, capital investment, living expenses and tax. After this is the available cash.

    Use all available methods to reduce the tax you should pay.