All unincorporated farm businesses in NI currently paying tax on profits should consider setting up as limited companies, a leading accountant has suggested.
Giving his views to UFU members last Tuesday, Lowry Grant, a director of accountancy firm PKF-FPM, pointed to 19% tax rates on company profits, compared to 20% and 40% tax rates for the self-employed, and not including national insurance contributions.
“If you have income that uses up your personal allowances, then almost any level of income makes it worthwhile becoming a limited company,” said Grant during the online event.
Businesses with profits below £50,000 will continue to be taxed at 19%
While UK corporation tax is increasing to 25% from 1 April 2023, this only applies to profits over £250,000. Businesses with profits below £50,000 will continue to be taxed at 19%, with a tapered rate introduced for those between £50,000 and £250,000.
Grant maintained that most of his farm clients who set up companies take out a modest salary to avail of personal allowances. After that, there is the option to pay a dividend to shareholders. Of this, the first £2,000 is tax free, with basic rate taxpayers paying 7.5% thereafter.
“With an incorporated business, there are no payments on account. Nine months later you pay your tax. There is no catch-up or balancing charges,” said Grant.
He said that unincorporated farms often bring in multiple family members into the business to try to keep their overall tax bill down, but that can lead to unintended consequences if there is a fall-out/divorce etc.
It is also easier to plan for succession in a company, as the ownership is defined, and proportions of the farm enterprise can be passed on in shares to a young farmer each year. All normal exemptions around inheritance tax and capital gains tax apply.
In terms of moving the business over to a limited company, Grant described it as a “fairly painless process”, likely to take around four to six weeks.
He also pointed out that a farmer could have a limited company running alongside an unincorporated business – eg the poultry enterprise is incorporated, but the dairy enterprise isn’t. “I can’t really envisage any circumstances where that would be an advantage, but it is entirely possible,” said Grant.
One disadvantage sometimes cited by farmers is that as a company, you have to file accounts.
“You will have to file abbreviated accounts. There is very little on the farm balance sheet that has any sensitivity. In fact, it is almost meaningless,” responded Grant.
He also suggested that some banks have in the past, not been keen on farms becoming limited companies, preferring to keep clients “on the hook for all liability”, especially where there is significant debt in the business.
However, there are other banks who have been very willing to move debt associated with the likes of land purchase into limited companies so long as the debt is properly secured, and loan-to-value, and repayment capacity, stacks up.
A UK government scheme to encourage research and development (R&D) offers an “incredibly valuable incentive” for farm businesses, James Gibson from London-based financial consultancy firm, RCK Partners told the UFU online event last Tuesday.
R&D tax credits were brought in back in 2000 as a form of government funding to stimulate innovation in the UK. For every £1 a business spends on R&D, up to 33p can be claimed back from HMRC (25p if the business is profit making). According to Gibson many farms are missing out as the scheme “is not widely known about, and not widely used”.
There is a lot of jargon, and it needs to be vague
Only limited companies can avail of the scheme, and while various input costs are potentially covered, that does not include capital expenditure such as machinery. There are various criteria to be met, including that there is some degree of technological uncertainty, and an advancement made, as a result of the project.
“There is a lot of jargon, and it needs to be vague (to allow companies across sectors to claim),” explained Gibson, but he maintained that on a progressive farm, it is likely that problems are being identified and overcome that would qualify.
His range of examples included a poultry farm trying to improve the wellbeing and feed conversion rate of birds, and a pig farm manipulating diets to improve growth rates and fertility. On a dairy farm, it could be changes made to the ration to try to improve overall yield or yield of milk solids.
He quoted a worked example of a dairy farmer spending £1m annually on feed. A proportion of that feed bill (15%) is assigned to the R+D project, and once other costs are added in (wages, utility bills etc) it is total qualifying expenditure of £180,500. With the farm able to claim back 25%, it works out at £45,125 per year.
For a first-time claimant, it is possible to go back two years retrospectively, so in the first year, this farmer has received over £90,000 from the scheme.
RCK Partners is one of a number of firms specialising in R&D tax credits.
The first step in claiming is a consultation with an RCK expert to decide what might qualify. Assuming a project is identified, RCK will produce a report for HMRC, along with a cost collection to apportion R&D expenditures.
While there is no stipulation on the minimum size of the business, Gibson accepted that costs probably need to be into the “hundreds of thousands” for it to be worthwhile to put in the time to make a claim. A business should also work closely with their accountant.
“This whole process should take no longer than four weeks. HMRC pay out R&D benefits within 28 days. We are offering all UFU members a consultation to discuss this,” said Gibson.
Farmers who have existing variable rate loans currently referencing the London Inter-Bank Offered Rate (Libor) can expect to be contacted by their lender later this year, ahead of a global switch away from use of this interest rate benchmark.
Back in 2017, global regulators, including the UK Financial Conduct Authority (FCA), announced that they will no longer require the main banks to participate in the calculation of Libor from the end of 2021.
Sonia is based on actual transactions and reflects the interest rates banks have to pay overnight to borrow sterling
Instead, the FCA has proposed that alternative reference rates are used to indicate the cost of borrowing, with the Bank of England recommending the Sterling Overnight Indexed Average (Sonia) index as its preferred option.
Sonia is based on actual transactions and reflects the interest rates banks have to pay overnight to borrow sterling, whereas Libor predicts what banks would have to pay to borrow money off each other for short-term loans.
Neil Parker from AIB told the UFU online event last Tuesday: “We are purely talking about existing Libor contracts.
“Your lender might offer you a range of alternatives such as Sonia, a base rate or a fixed rate loan.
“The regulator is expecting active conversion by the end of Quarter 3. You can expect to get contact over the next few months.”
Richard Primrose from Bank of Ireland UK added: “The replacement product offered will be based on customer needs. Customers will be given adequate time to consider their options.”