High tax bills this year have increased the interest in moving to a limited company. It is easy to just look at the 12.5% tax rate but limited companies are certainly not for everyone. You should start by trying to find reasons not to go in. Will a low milk price in 2015 make it more attractive to hold off for one more year? The decision needs careful consideration and a lot of planning. But if it suits your situation, it can really help to develop your business and give more control over potential tax bills.
There is a lot of interest from farmers looking at the option, but each has to look carefully at their own situation, both now and in the future, and get good advice.
Advantages
The biggest advantage is the 12.5% corporation tax on trading profits compared with a marginal rate of up to 52% for the individual farmer earning over €32,800. So, for every €1,000 profit in the company €395 (€1,000*(52%-12.5%)) is sheltered from tax. This comes into its own when farmers are expanding and have loans inside the company.
If you require bank borrowings to fund future farm development, expansion or a land purchase, such borrowings are paid back to the bank from after tax income.
Don’t get confused with interest payments, which are tax deductible. Capital repayments are not tax deductible. Therefore, if Fred is to repay the €250,000 loan and assuming he could be paying income tax rates up to 52%, he would need to earn €520,833 before tax to repay these borrowings. However, if trading as a company, the company would only need to earn €285,714 before tax to repay these borrowings. That’s a difference of €235,118.
Limited companies also restrict the exposure of the company directors to the amount of money inside the company. However, banks are now seeking personal guarantee for loans or money that the companies owe.
You can have more flexibility on pension contributions within a limited company.
The company receives a full tax deduction for the payment to the director pension fund.
Pension planning is by far the most common way to remove excess funds from a company.
Disadvantages
It is not all positive. Running a limited company presents another layer of paperwork for farmers.
A limited company must file annual accounts with the companies’ registration office, which is normally more costly and time consuming than that of a sole trader. In most cases, accountancy fees will be double what they currently are.
Income averaging is not an option for a limited company. The effect of income averaging moving to five-year in 2015 should be carefully looked at first. This is an important tool for minimising tax on many farms, especially when profits are rising.
A tax bill can also be triggered when a farmer goes from income averaging into a company. Careful tax planning can avoid this.
There are many rules and regulations and we are moving into an era where they are going to be carefully enforced. For example, loans of up to 10% of the assets can be made to directors but create a benefit in kind for the director who is liable to income tax at his marginal rate each year until the loan is repaid. If the loan is written off, it is treated as personal income and could be liable to taxes at 52%.
When there are outstanding loans outside the company, the income is now inside the company.
The money you take out to repay capital will attract income tax at marginal rate. Again, planning is vital to avoid this.
A company creates a complication for succession planning. In general, the tax rules that apply are slightly more restrictive, complex and less generous for the company structure than for individual farmers.
Farmers who should consider setting up a company are those who:
Do not/will not need a significant
portion of their farm profits for living
expense/drawings each year, most
common where there is off-farm
income,Are already paying significant income tax,Have more than 10 years left before they retire,Plan on expanding their business over the next 10 years and will require borrowings to fund expansion,Have already exhausted all other tax reduction options, such as family wages, and spouse’s credits.The cost of moving to a company
Moving into a limited company should cost between €4,000 and €6,000. I checked with a few accountants after one farmer rang me with a quote of €12,000, which he received from his accountant. ‘‘Sure it will only be €6,000 after tax,’’ was the accountant’s reply when challenged.
The farmer sent me the quote. In fairness, it included about four pages of what the accountants were going to do. It looked impressive but many of them were simple things that would take a few minutes.
Limited companies can be purchased set-up for around €400. There were no major complications with the farmer, which I could see.
One of the biggest issues in the past was handling milk quota but now that will be gone, which makes it simpler. If you are going to your accountant, make sure you know what he/she should be charging.
New basic payment
There is no difficulty with a farmers transferring his entitlements into a limited company before 15 May 2015. The sole trader would need to complete a 2015 Transfer of Allocation Right Form transferring his allocation right and reference value to the company by way of ‘‘change of legal entity’’’.
It would, of course, involve a transfer of the herd number from the sole trader to the company. The form should be available shortly.
The one area that is still unclear is how new basic payment entitlements will be valued for capital gains tax purposes.
I will return to this subject in 2015.
More to decision than tax rate. Look at effect on business.Each situation is different.New entitlements can be transferred but CGT position still unclear.Get good advice but don’t pay too much.
High tax bills this year have increased the interest in moving to a limited company. It is easy to just look at the 12.5% tax rate but limited companies are certainly not for everyone. You should start by trying to find reasons not to go in. Will a low milk price in 2015 make it more attractive to hold off for one more year? The decision needs careful consideration and a lot of planning. But if it suits your situation, it can really help to develop your business and give more control over potential tax bills.
There is a lot of interest from farmers looking at the option, but each has to look carefully at their own situation, both now and in the future, and get good advice.
Advantages
The biggest advantage is the 12.5% corporation tax on trading profits compared with a marginal rate of up to 52% for the individual farmer earning over €32,800. So, for every €1,000 profit in the company €395 (€1,000*(52%-12.5%)) is sheltered from tax. This comes into its own when farmers are expanding and have loans inside the company.
If you require bank borrowings to fund future farm development, expansion or a land purchase, such borrowings are paid back to the bank from after tax income.
Don’t get confused with interest payments, which are tax deductible. Capital repayments are not tax deductible. Therefore, if Fred is to repay the €250,000 loan and assuming he could be paying income tax rates up to 52%, he would need to earn €520,833 before tax to repay these borrowings. However, if trading as a company, the company would only need to earn €285,714 before tax to repay these borrowings. That’s a difference of €235,118.
Limited companies also restrict the exposure of the company directors to the amount of money inside the company. However, banks are now seeking personal guarantee for loans or money that the companies owe.
You can have more flexibility on pension contributions within a limited company.
The company receives a full tax deduction for the payment to the director pension fund.
Pension planning is by far the most common way to remove excess funds from a company.
Disadvantages
It is not all positive. Running a limited company presents another layer of paperwork for farmers.
A limited company must file annual accounts with the companies’ registration office, which is normally more costly and time consuming than that of a sole trader. In most cases, accountancy fees will be double what they currently are.
Income averaging is not an option for a limited company. The effect of income averaging moving to five-year in 2015 should be carefully looked at first. This is an important tool for minimising tax on many farms, especially when profits are rising.
A tax bill can also be triggered when a farmer goes from income averaging into a company. Careful tax planning can avoid this.
There are many rules and regulations and we are moving into an era where they are going to be carefully enforced. For example, loans of up to 10% of the assets can be made to directors but create a benefit in kind for the director who is liable to income tax at his marginal rate each year until the loan is repaid. If the loan is written off, it is treated as personal income and could be liable to taxes at 52%.
When there are outstanding loans outside the company, the income is now inside the company.
The money you take out to repay capital will attract income tax at marginal rate. Again, planning is vital to avoid this.
A company creates a complication for succession planning. In general, the tax rules that apply are slightly more restrictive, complex and less generous for the company structure than for individual farmers.
Farmers who should consider setting up a company are those who:
Do not/will not need a significant
portion of their farm profits for living
expense/drawings each year, most
common where there is off-farm
income,Are already paying significant income tax,Have more than 10 years left before they retire,Plan on expanding their business over the next 10 years and will require borrowings to fund expansion,Have already exhausted all other tax reduction options, such as family wages, and spouse’s credits.The cost of moving to a company
Moving into a limited company should cost between €4,000 and €6,000. I checked with a few accountants after one farmer rang me with a quote of €12,000, which he received from his accountant. ‘‘Sure it will only be €6,000 after tax,’’ was the accountant’s reply when challenged.
The farmer sent me the quote. In fairness, it included about four pages of what the accountants were going to do. It looked impressive but many of them were simple things that would take a few minutes.
Limited companies can be purchased set-up for around €400. There were no major complications with the farmer, which I could see.
One of the biggest issues in the past was handling milk quota but now that will be gone, which makes it simpler. If you are going to your accountant, make sure you know what he/she should be charging.
New basic payment
There is no difficulty with a farmers transferring his entitlements into a limited company before 15 May 2015. The sole trader would need to complete a 2015 Transfer of Allocation Right Form transferring his allocation right and reference value to the company by way of ‘‘change of legal entity’’’.
It would, of course, involve a transfer of the herd number from the sole trader to the company. The form should be available shortly.
The one area that is still unclear is how new basic payment entitlements will be valued for capital gains tax purposes.
I will return to this subject in 2015.
More to decision than tax rate. Look at effect on business.Each situation is different.New entitlements can be transferred but CGT position still unclear.Get good advice but don’t pay too much. 
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