Farming and income tax
Farming as a Limited Company - potential tax savings and pitfalls
Is your tax rate 31% or more?
'Recent changes to tax credits, the introduction of income levies and the universal social charge, and the upward trend in farm incomes means that many farmers should review their tax structure.'
Here, I am outlining in summary the main advantages and disadvantages of farming under a limited company structure. It is important to note that while the significant tax advantages are attractive, a limited company structure is suitable for only a minority of farm businesses.
'Recent changes to tax credits, the introduction of income levies and the universal social charge, and the upward trend in farm incomes means that many farmers should review their tax structure.'Here, I am outlining in summary the main advantages and disadvantages of farming under a limited company structure. It is important to note that while the significant tax advantages are attractive, a limited company structure is suitable for only a minority of farm businesses.
A detailed review of your individual circumstances should be undertaken prior to entry to this structure. Professional legal and tax advice are crucial to making a well informed decision.
Rate of tax: The company tax rate on trading profits is 12.5% compared with a tax rate of up to 55% (income tax and levies) for an individual.
Ability to repay loans: The company tax rate of 12.5% leaves 87.5 cent from every euro trading profit retained in the company for development/loan repayments compared with as little as 45% when trading as an individual sole trader.
Example: The table shows that a company requires a pre-tax profit of €1,143 to repay a €1,000 loan, while an individual must generate a pre-tax profit of €2,222 to meet the equivalent loan repayment.
Better tax write-off for pension contributions: a benefit to be derived from using a limited company is the more generous tax treatment afforded to company pension plans compared with self-employed pension plans.
Limited liability: where a limited company is unable to pay its debts, the promoter's exposure to these debts is limited to the amount of the called-up share capital.
In practice we find in many cases that limited liability is diluted due to the banks insistence on securing personal guarantees from directors for bank borrowings.
Where bank loans are being transferred to a company, the bank may use this as an opportunity to amend/claw back any favourable loan rates, which would be a disadvantage.
Higher Company Tax Rate on Investment Income: The tax rate on investment income arising within the company is 25% and, if not distributed to shareholders within 18 months, it becomes liable to a surcharge, giving rise to a total tax rate within the company of 40%.
Withdrawing Money from the Company: in most cases, the transfer of company money to an individual is taxable as income in the hands of the director/shareholder. This is by far the hardest concept for a businessman to accept, i.e. 'it is my money; why can't I withdraw it as I wish?'
This lack of flexibility arises because the company is a separate and distinct legal person from the shareholders who own it. Recent budgets have contained specific anti-avoidance provisions to counter tax avoidance schemes, including those aimed at extraction of money from a company without the recipient paying income tax.
Prohibition on excess Company Loans to Directors: 'Surely, I can get a loan from my own company!' Company directors and shareholders are prohibited by law from receiving loans totalling 10% or more of the company's net value. Given that in the vast majority of cases, the land will not be within the company, 10% of net worth may not be a very large amount.
Infringement of this law is an indictable offence and must be reported by the auditor to the Office of the Director of Corporate Enforcement.
Estate Planning, more complex: The Capital Gains Tax and Capital Acquisitions Tax allowances and reliefs are more complex and restrictive than those applying to a sole trader wishing to transfer his farm land and farm business to the next generation.
Loss of confidentiality: a small Irish registered company is obliged to file a copy of its balance sheet with the Companies Registration Office and the balance sheet is open for inspection by the public.
Major Benefits for Higher Rate TaxPayers: there are major tax saving benefits to be derived by higher rate taxpayers.
Such savings will depend on the directors' requirements for living and personal expenses in the short to medium term and a sound, viable and clear plan for utilising the after tax profits within the company.
Source: newsroom - farmingnewsdaily.co.uk