Farm Ireland
Independent.ie

Tuesday 6 December 2016

Would having a limited status benefit your farm?

Martin O'Sullivan

Published 05/10/2016 | 02:30

The general perception is that forming a limited company can have significant tax benefits. This is very true but what many people do not understand is the nature and scope of those tax savings.

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The big attraction in forming a company is the 12.5pc Corporation Tax rate which compares with an effective top rate of personal tax amounting to 55pc when one includes PRSI and Universal Social Charge.

This represents a massive saving but it only applies to profits that are retained by the company and not spent personally.

So if it were the case that your company made a profit of €60,000 before paying you a salary and you needed €60,000 to live on and pay your personal tax, well then there would be no saving by trading as a company as all of the profit earned by the company was paid out by way of salary leaving no retained profit.

However if all you needed was say €34,000 to live on, there would be a saving in the region of €9,750. In reality this could be viewed as more a deferral of tax rather than a permanent saving because if you need to get your hands on this retained profit as some future date you may pay personal tax on it.

That of course presumes that there are no legitimate avenues available to you towards extracting cash from your company. In this article I will outline the various mechanisms for extracting cash.

Expenses

You are entitled to pay yourself legitimate expenses from your company provided these expenses relate to costs actually incurred on behalf of the company.

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The best example is motor expenses which may be paid by way of a mileage allowance on your private vehicle in respect of travel associated directly with the farm business.

Provided you maintain a record of the mileage done and the purpose of same, the Revenue will have no difficulty in you claiming the relevant rate per mile that they set down which is set out on table A. This is described by Revenue as the Civil Service Mileage Motor Travel Rate even though it is available to all company employees including directors.

It should be noted that your farmyard is regarded as your place of work and it is from there all mileage is recorded so if your dwelling happens to be 3 miles away you cannot claim mileage for travelling between your dwelling and the farmyard.

You can also claim the Revenue Civil Service Flat Rate Subsistence Allowance if you happen to be away from your farmyard on farm business for a period exceeding five continuous hours provided the business is being conducted at a location more than 8km away from your farmyard.

Table B sets out the current allowances. Again it should be noted that accurate records must be maintained of the location, purpose and date and time of leaving and returning.

Out of pocket expenses such as meals can only be claimed where you have a receipt and full details in support of the expense being directly related to the conduct of your business. It should be noted that you cannot claim out of pocket expenses as well as a subsistence payment in respect of the same event.

Director's Loan Account

When you create a limited company in the first instance you will as a matter of course sell your stock and farm machinery and equipment into the company at their tax values obtaining at the date of incorporation.

This is a tax neutral transaction and gives you the opportunity to withdraw this money from the company at some future date free of all taxes.

This is a type of tax free nest egg that ideally should not be used up on personal drawings as it may be needed at some future date to meet children's education costs or the purchase of land or the cost of family settlements.

Occasionally, where servicing personal debt is proving an unmanageable burden because of the personal tax consequences it may be possible to add to your director's loan account by disposing of a parcel of land to the company in order to service the debt in a tax efficient manner.

If such a sale is free of Capital Gains Tax (such as farmers over 55 years availing of Retirement Relief) it may offer a very effective way of dealing with the problem.

Shares buyback

Where a farmer shareholder is over 55 years an opportunity may exist to extract tax free cash from the company by way of the company buying back its own shares. This will generally mean the farmer disposing of most of his shareholding but it can be a good strategy for succession planning, or God forbid, a marriage break-up situation. Eligibility is not straight forward but there are a number of basic conditions that apply such as the shareholder must own the shares for a period of at least five years and the share buyback must be for the benefit of the company's trade.

In addition the participating shareholder's remaining shareholding in the company after the buyback must not exceed 75pc of what it was pre the buyback and the shareholder and his spouse must no longer own more than 30pc of the capital of the company.

For farmers over 55 years and under 66 years there is an opportunity to extract up to €750,000 tax free or for farmers over 66 the limit is €500,000.

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