High tax bills for some farmers 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.
At the Teasgac business conference in Tullamore recently, Áine Holling of Revenue said that it has no issue with farmers setting up companies, but in many cases it has proven not to be the right decision.
The two main reasons she gave were that many were taking too much out of the company as drawings, thereby attracting the higher rates of personal tax.
The other was that farmers did not understand that a company is a separate entity and has to be treated as such. Many of the farmers still had one bank account and did not separate the company’s money from their own.
The decision to go into a company needs careful consideration and needs a lot of planning to get it right. But if it does suit your situation, it can really help to develop your business and give you more control over any potential tax bill.
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 will require bank borrowings to fund future farm development or expansion, land purchase etc, any 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 you have to repay the €250,000 loan and assuming you may be paying income tax rates up to 52%, you 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 €235,119.
Limited companies also restrict the exposure to the company directors the amount of money inside the company. However, banks are now seeking personal guarantees 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. Moving into a limited company could cost between €4,000 and €6,000.
Income averaging is not an option for a limited company. The impact of income averaging moving to five years 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. Áine said, in many cases, the cessation of sole trader and transition into a company is not done right, leading to double taxation. 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. New company rules put greater onus on directors and how they do transactions with their company.
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 applying are slightly more restrictive, complex and less generous for the company structure than individual farmers. Again, this has to be carefully planned.
Potential candidates
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 expenses/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, eg family wages, spouse credits, etc.Tax queries
Are you allowed to transfer goodwill of the farm business built up into a limited company?
Goodwill is what is left after all the other assets are sold.
It’s an intangible asset that accounts for what a company pays for assets over their book value.
Áine did not rule out the fact that a farming business has the potential to have goodwill, but said it was more difficult to establish if land is not being transferred in the limited company.
She said the aggressive use of goodwill to create directors’ loans while the sole trader is trying to claim retirement relief sets off alarm bells in Revenue.
Áine also confirmed that farmers can give the company a licence or nominal lease on land and not have to pay out rental costs.
Under a licence, the company has the right to farm the land, but the landowner should be incurring some costs to maintain the land.
Tech Corner
James Hurley who milks 70 cows two miles outside Clonakilty, Co Cork, now sees the mobile phone as the second most-important tool on the farm after the milking machine.
I now have a HTC 1 phone and, apart from the milking machine, it is the most used tool I have in my farm business.
The main functions on the phone I use are the camera (very useful for farm walks, etc), alarm clock, calculator, flashlight, the notes function, which allows me to make notes as I go along (for example, number of cows bulling, fertiliser spread and where).
The main apps I use are:
Weather forecasts: I use three different ones – Met Eireann, AccuWeather and YR, the Norwegian service which I find the easiest to use and the most accurate.
Fields Area Measure: It’s an app I use to measure field and paddock sizes.
Mastitis Cost Calculator: This is new and works out the cost of a case of mastitis in your herd. It appears easy to use with no annoying pop-up ads.
Farmers Journal news app: Self-explanatory – number one app for farm news.
Toplink, eBay and Donedeal: For all those bargains.
Radioplayer app: I listen to some of the farming radio programmes from around the country.
farmPhoto.com: The complete farm photo collection on the web.
Facebook: For keeping in contact socially.
Twitter: I use twitter as my farming social media outlet.
The phone is now indispensable in the running of my business.
I also have Minecraft and Angry Birds on the phone to entertain my three children when necessary.
How do you use
technology? Email
bizsense@farmersjournal.ie
High tax bills for some farmers 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.
At the Teasgac business conference in Tullamore recently, Áine Holling of Revenue said that it has no issue with farmers setting up companies, but in many cases it has proven not to be the right decision.
The two main reasons she gave were that many were taking too much out of the company as drawings, thereby attracting the higher rates of personal tax.
The other was that farmers did not understand that a company is a separate entity and has to be treated as such. Many of the farmers still had one bank account and did not separate the company’s money from their own.
The decision to go into a company needs careful consideration and needs a lot of planning to get it right. But if it does suit your situation, it can really help to develop your business and give you more control over any potential tax bill.
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 will require bank borrowings to fund future farm development or expansion, land purchase etc, any 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 you have to repay the €250,000 loan and assuming you may be paying income tax rates up to 52%, you 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 €235,119.
Limited companies also restrict the exposure to the company directors the amount of money inside the company. However, banks are now seeking personal guarantees 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. Moving into a limited company could cost between €4,000 and €6,000.
Income averaging is not an option for a limited company. The impact of income averaging moving to five years 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. Áine said, in many cases, the cessation of sole trader and transition into a company is not done right, leading to double taxation. 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. New company rules put greater onus on directors and how they do transactions with their company.
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 applying are slightly more restrictive, complex and less generous for the company structure than individual farmers. Again, this has to be carefully planned.
Potential candidates
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 expenses/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, eg family wages, spouse credits, etc.Tax queries
Are you allowed to transfer goodwill of the farm business built up into a limited company?
Goodwill is what is left after all the other assets are sold.
It’s an intangible asset that accounts for what a company pays for assets over their book value.
Áine did not rule out the fact that a farming business has the potential to have goodwill, but said it was more difficult to establish if land is not being transferred in the limited company.
She said the aggressive use of goodwill to create directors’ loans while the sole trader is trying to claim retirement relief sets off alarm bells in Revenue.
Áine also confirmed that farmers can give the company a licence or nominal lease on land and not have to pay out rental costs.
Under a licence, the company has the right to farm the land, but the landowner should be incurring some costs to maintain the land.
Tech Corner
James Hurley who milks 70 cows two miles outside Clonakilty, Co Cork, now sees the mobile phone as the second most-important tool on the farm after the milking machine.
I now have a HTC 1 phone and, apart from the milking machine, it is the most used tool I have in my farm business.
The main functions on the phone I use are the camera (very useful for farm walks, etc), alarm clock, calculator, flashlight, the notes function, which allows me to make notes as I go along (for example, number of cows bulling, fertiliser spread and where).
The main apps I use are:
Weather forecasts: I use three different ones – Met Eireann, AccuWeather and YR, the Norwegian service which I find the easiest to use and the most accurate.
Fields Area Measure: It’s an app I use to measure field and paddock sizes.
Mastitis Cost Calculator: This is new and works out the cost of a case of mastitis in your herd. It appears easy to use with no annoying pop-up ads.
Farmers Journal news app: Self-explanatory – number one app for farm news.
Toplink, eBay and Donedeal: For all those bargains.
Radioplayer app: I listen to some of the farming radio programmes from around the country.
farmPhoto.com: The complete farm photo collection on the web.
Facebook: For keeping in contact socially.
Twitter: I use twitter as my farming social media outlet.
The phone is now indispensable in the running of my business.
I also have Minecraft and Angry Birds on the phone to entertain my three children when necessary.
How do you use
technology? Email
bizsense@farmersjournal.ie
This is a subscriber-only article
SHARING OPTIONS: