Teagasc provides an invaluable service for those needing practical advice when considering a new business start up. But, as regards the financial considerations, how will your new trade be treated for tax purposes and what are the tax impacts?
If a hobby activity is being carried out then any profits are not liable to tax and conversely no relief is available for any losses incurred. The question of whether a taxpayer is carrying on a trade is primarily based on fact. Some of the primary considerations to help determine if your hobby has made the transition to a full-blown trade are:
•The frequency of the transactions. For example, are mares and foals being bred, bought and sold on an annual basis?
•The motive of the taxpayer. Is the taxpayer's intention to make a profit from this activity or simply to have an interest for hobby purposes?
If considered a trade, the income will be liable to income tax or corporation tax depending on the ownership structure, as a Case 1 trading receipt. In practice, distinguishing if a trade is being carried on is often far from clear, so if in doubt get professional advice in advance of adopting any particular tax treatment.
A farming activity, for tax purposes, can be defined as an activity for which land in the State is being occupied for the purposes of husbandry. If an existing farming trade is already being carried on then the introduction of a new trade will be required to be kept separate, ie all income and expenditure in relation to this new trade should be clearly identifiable and not included with the income and expenditure of the farming activity.
For income tax purposes, a taxpayer can elect for losses from one trading activity to be offset against total income in the year the loss is incurred. Any excess loss can then only be carried forward against income from that trade.
•Case 1 loss -- Beef farming: Â¤15,000
•Case 1 profit -- Horse sales: €5,000
•Schedule E -- Equestrian centre job: €30,000
The loss of €15,000 incurred in the farming activity can be used to offset total income of €35,000 reducing the taxable income to €20,000.
A farming loss incurred in the fourth year of trading, after three years of consecutive losses, will not be available for offset against total income. Instead, this loss becomes ring- fenced and is only available to carry forward against profits of the farming trade.
For those involved in horse production and standing stallions, the costs associated with maintaining the stallion can be claimed as a deduction, as well as the cost of the stallion. The stallion is not considered stock in trade, but instead a deduction for its original cost will be allowed over a four-year period. If a stallion is sold or dies in this period, a full deduction can be taken in the year of death or sale, for the balancing amount of the initial market value cost not yet claimed. Broodmares and foals form part of the stock in trade and a deduction for their costs are generally taken at the point of sale.
Any profits earned by horses in training are not liable to tax, including competition winnings or proceeds from the sale of the horse. Consequently, the costs incurred while the horse is in training are not tax deductible.
Stallion or syndicate owners who do not carry out a farming trade are considered to be carrying out an investment activity and their net income will be liable as a Case V receipt. The tax implications of this depends on the ownership structure in place. In the case of a company, the income will be liable at the higher corporation tax rate of 25pc, while an individual will continue to be liable at their marginal rate. In both cases losses made on the investment activity are 'ring fenced' so they can only be used against profits from the same activity.
The reduced VAT rate of 9pc which applies to the provision of pony trekking facilities and horse riding effective from July 1 2011 may provide an incentive to those considering branching into these areas.
The provision of livery services is liable to VAT at the reduced rate of 13.5pc. In all the above cases, registration for VAT is only required where the current threshold of €37,500 a year for the supply of services and €75,000 for the supply of goods are exceeded. It is important that flat-rate farmers, starting new trades, consider the VAT impact this may have on their existing flat-rate status for farming purposes.
Sasha Kearns is a tax director with Grant Thornton