Practices to be avoided
Incorporation can have a lot to offer in terms of tax savings and also in terms of a suitable structure to accommodate the farmer and his successor(s).
However trading as a limited company involves two layers of compliance, namely compliance with good corporate governance which is overseen by the Companies Registration Office (CRO) and also tax compliance.
Good corporate governance means that the all dealings between the farmer and his company have to be at arm's length and have to pass the test of commercial reality.
Your dealings with your company can be no different to dealing with a total stranger. In recent years, farming company issues are probably one of the more frequent topics that my firm is consulted on and unfortunately, the level of corporate and tax compliance leaves a lot to be desired in some instances.
I will detail the most common practices that give cause for concern.
Buildings built by the company on land it has no freehold or leasehold title to is a common occurrence. Such situations can have legal and taxation consequences in the event of the company being wound up.
In all cases where buildings are likely to be erected, a long-term lease to the company of the farmyard and any adjacent land that might be built upon in the future should be drawn up.
Herd number and Basic Payment
It is important when forming a company that the 'to do list' includes transferring the herd number and Basic Payment entitlements to the company.
In some instances, this has not occurred for a variety of reasons and Revenue could take issue. That said, legal opinion would suggest that if the company is clearly carrying on the farming activity, it is the beneficial owner of the BPS payment. Nevertheless, it is strongly advised that the herd number and BPS entitlements are transferred
Some accounting practitioners appear to hold the view that a farm business contains a marketable goodwill element.
This may be the case with certain specialist producers who have carved out a niche market for their particular product and if their farm business was being sold as a going concern, it may attract some added value for this reason. Such added value can be classified as goodwill.
However, a normal commercial farm is unlikely to carry any goodwill as nobody will pay any more for it than the collective asset market value.
Accordingly, any suggestion to sell notional goodwill to the company to create or augment a director's loan account where no realistic case can be made for the existence of goodwill in the first place should be questioned and a second opinion sought.
CASE STUDY 1
This enterprise is based on an 80-cow dairy herd producing 420,000 litres of milk in 2015 with a small beef enterprise and a Basic Payment of €16,400. The taxable farm profit after capital allowances but before any remuneration to the owners in the form of rent or salary was €75,600. The farmer paid himself and his wife a combination of salary and rent of slightly in excess of €40,000 net. There is no off farm income.
The salary and rent when grossed up for tax purposes amounts to €51,000 approximately. The farmer and his wife paid personal tax, PRSI and USC of €10,782 and Corporation Tax of €3,075, making a total of €13,857. Had they operated as a sole trader, he would have paid a total of €18,567. There was a saving from trading as a company of €4,710.
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While a saving of €4,710 is not insignificant, the farmer did incur additional accountancy charges of approximately €1,000 by trading as a company, thereby reducing the saving to €3,710. This could be regarded as a marginal case but the farmer is happy that by trading as a company, he has far greater control over his tax bill and is looking at the cumulative tax he will save over the coming years.
CASE STUDY 2
This enterprise is based on a 180-cow dairy herd producing 990,000 litres of milk in 2015 along with a small beef enterprise and a Basic Payment of €26,600. The taxable farm profit after capital allowances but before any remuneration to the owner in the form of rent or salary was €136,000 approx. The farmer paid himself a combination of salary and rent of €30,000 net. His wife is employed off the farm and is paying tax at the 40pc rate.
The salary and rent when grossed up for tax purposes amounts to €39,000 approximately. The farmer paid personal tax, PRSI and USC of €8,053 and Corporation Tax of €12,125, making a total of €21,077. Had he operated as a sole trader, he would have paid a total of €59,629. There was a saving from trading as a company of €38,552.
CASE STUDY 3
This enterprise is based on a 60-cow dairy herd producing 360,000 litres of milk in 2015 and a Basic Payment of €13,200. The taxable farm profit after capital allowances but before any remuneration to the owner in the form of rent or salary was €43,600. The farmer is single and paid himself a combination of salary and rent of €18,000 net. There is no off-farm income.
The salary and rent when grossed up for tax purposes amounted to €22,000 approximately. The farmer paid personal tax, PRSI and USC of €4,023 and Corporation Tax of €2,700, making a total tax bill of €6,723. Had he operated as a sole trader, he would have paid a total of €11,297. There was a saving from trading as a company of €4,774.
By present-day standards, this is a relatively small enterprise and many farmers of this size may simply not consider trading as a company. However, the farmer in question considers a saving of €4,724 to more than justify him trading as a company and is more inclined to consider expansion as he feels that tax is not going to be a disincentive which he had always felt was the case when he was trading as a sole trader.
Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and registered auditors. www.som.ie. Ph: 051 640397