Farming Through A Company

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1 Farming Through A Company Kevin Connolly Financial Management Specialist Company Tax Rates Two rates of tax apply to companies Basic corporation tax rate 12.5% Applies to trading profits Passive tax rate 25% Applies to passive income investment and rental income This income can t be allowed build up in the company indefinitely 20% surcharge applies if not distributed with 18 months VAT company can remain unregistered and claim 5.2% flat rate addition 1

2 The company route.. Worth looking at??? High personal tax rates 55% for > 100k Capital allowances exhausted Planned further expansion investment No Capital allowances / high borrowings needed Further restrictions on scope for tax relief on personal pension contributions High personal demand for cash from the business A company is.. A separate legal entity You are not the farmer the company is! Business profits belong to the company first! Company will have its own bank account All business expenses invoiced to the company You become a shareholder/ director Director duties 2

3 Key questions Are you paying the top rate of tax? Are you maximising all available reliefs and allowances to reduce your tax liability? How much of your annual business profit do you need to withdraw as personal drawings? Is there off-farm income which reduces demand on farm cash for personal use? Future farm profits & personal drawings Higher or Lower?? Key questions Are you looking at sustained (& increasing) high business profits? A short period of high profits may not justify forming a company These short term rises can be smoothed out with income averaging & still remain a sole trader Are you planning business expansion? High company retained earnings (after paying corp. tax of 12.5%) can be used to fund this 3

4 Repaying Debt Sole Trader Pay 41% tax + PRSI + USC before capital repayment To repay 20,000 principle requires 41,666 profit if at top rate Company Pay 12.5% tax before capital repayment To repay 20,000 principle requires 22,857 profit Life Cycle of the business Don t change over if owner is retiring in the foreseeable future Loss of retirement relief from CGT on land rented out to the company No stamp duty refief if the young farmer puts it straight into the company (declaration on intention to farm the land for 5 years). Could form a company in a number of years. CAT grey area is the company an agricultural asset to satisfy the 80% rule 4

5 Directors Loan Stock and machinery generally transfer to company Tax may be due on the difference between stock book value and market value Assets transferring into the company go in at maximum levels enlarge the size of the directors loan The directors loan may be drawn out of the company at any time as tax free income for the owner This loan should be protected as it provides an exit fund if required in the future The directors loan should not be used to fund drawings There may be CGT implications for transferring in SFP entitlements Other Issues Landlord cant get income tax relief on money from a long term lease received from a company Double chop company sells land and pays 25% CGT owner sells / transfers company and pays 25% CGT Keep appreciating assets out of a company 5

6 Making the switch New company has a separate legal status Ceasing as a sole trader & Commencing as a company Implications Revision of tax bill for previous year due to ceasing sole trader business Capital Allowances If significant building capital allowances still unused May be advisable to stay as sole trader until the bulk of these used up Company can t claim capital allowances unless it has ownership of the building Transferring building means transferring the land it stands on capital taxes 6

7 Transferring Business Assets Keep land in owners name and lease to company Avoids Stamp Duty issues on transfer Relief from Capital Gains Tax only if ALL business assets transferred Assets in the company may be hit with CGT charge on extraction Won t qualify for farmland leased income exemption Livestock & machinery transferred at book value no stamp duty applies on these transfers Transferring Business Assets Livestock & machinery transferred at book value no stamp duty or CGT applies on these transfers If transferred for no payment then Directors Loan created in favour of the owner Plan in advance of company set up to increase the value of these transferred assets May need to get 3 rd party valuations on these assets 7

8 Getting money out Annual salary Subject to PAYE, PRSI & USC Company repaying directors loans Loans are created when director transfers assets to the company for no payment These loans can be withdrawn tax free at any time Sole Trader V Company Taxation Farm Net Profit Drawings Spouse Income 70,000 35,000 35,000 Tax Payable - Personal Tax - Corp. Tax Sole Trader 23,181 Company 8,981 4,375 Tax Saving 9,825 8

9 Loans & Security Can existing loans be transferred to the company? Yes but the underlying asset may also have to be transferred (Stamp Duty & CGT??) Loans kept outside the company Repayments will have to be made out of company transfers/ payments to the owner These transfers will be subject to personal tax rates Repayments will have to be covered from after-tax cash benefits of low company tax will be lost Interest on non-company loans connected with land & buildings can be offset against money received from the company for the use of these assets Pension Payments Company can make contributions to directors pension Small Self Administered Pension Less restrictions on maximum amounts Pension contributions made are generally fully deductible against company profits 9

10 Company Paperwork Reduction in paper work promised in new legislation Register company name Register with Revenue Clearance with DAFF Milk quota leasing Transfer of Single Farm Payment entitlement Company Paperwork Annual accounts to be prepared Usually higher accountancy cost Accounts filed with Companies Registration Office Form B1 accounts summary attached Annual Tax Returns Corporation Tax Return CT1 Directors must file a separate return Form 11 10

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