Sole trader farmers with large tax bills might consider some of these common concerns before making any decisions
There are still a sizeable number of high personal tax paying farmers who would benefit handsomely by incorporating their farming businesses.
But they are reluctant to do so for a variety of reasons, many of which do not make an awful lot of sense.
In the course of my daily work, I frequently encounter sole-trader farmers with very hefty tax bills, and I ask them why they have not considered incorporating.
Their concerns are many and varied but the following are the most commonly expressed:
■ May give up in a few years
■ No successor
■ Thought they would have to register for VAT
■ Have considerable farm buildings allowances available
■ Would not be able to maximise TAMS grants
■ Money will be tied up in the company
■ Will have to transfer land into company
■ A company may be an impediment to succession.
The average farmer in Ireland is close to 60 years of age so it is not surprising that many contemplating incorporation may feel that it is not worth their while, given their age. In most instances this is simply not the case as the tax savings that can be secured over a short number of years can be quite significant.
In addition, getting up in the morning knowing that the taxman is going to get more than half of what you will earn that day can be demoralising whereas knowing that he is only going to get 12.5% can put a spring in your step and prolong your working life.
When you do decide to get out, winding down your company can be a simple and tax efficient process.
There is something of an urban myth that limited companies are obliged to register for VAT. This is not the case and the same rules apply to companies as sole traders or partnerships. Entitlement to reclaim VAT on buildings, fixed plant and land improvement is no different to sole traders or partnerships.
Farm building allowances
Unused capital allowances on farm buildings cannot be transferred over to a company, nor can they be offset against rent that you might charge the company for the use of your land or farmyard.
The sums will have to be done on the tax savings that these allowances will grant you as a sole trader versus the likely tax savings the limited company will create over the same period. If the availability of farm buildings allowances is the main impediment to incorporation, it should be a case of when rather than if, so doing the sums will determine when exactly it will be beneficial to incorporate because waiting until all of the allowances are run out may not make good financial sense.
Partnerships involving a young-trained farmer can qualify for a doubling of the TAMS investment limit from €80,000 to €160,000.
Unfortunately, this incentive does not apply to companies involving a young-trained farmer. Furthermore, if a farm partnership decides to incorporate within five years of receiving a TAMS grant, they will have to refund part or all of the benefit relating to the additional €80,000 investment incentive.
However, the higher 60% rate of grant will still apply where a young-trained farmer has a 20% or more shareholding in the company. The loss of the higher investment limit may not be sufficient justification to rule out incorporation as the projected tax savings over a five-year period should be weighed up against the loss of grant. In many instances the tax savings will be greater.
Money tied up
It is the case that retained cash held in the company is readily accessible for expenditure associated with the farm but not so for personal use without being subject to income tax. However, there are ways and means of extracting tax-free money from a company.
In most cases the owner will at the outset have sold their stock and machinery to the company and will have accumulated what is known as a director’s loan.
In other words, the company will owe them for the stock and machinery which it can repay free of all taxes when the funds are available and when the director needs the money. In addition, where the company has traded for 10 years, and where the shareholder is over 55 years, they can extract up to €750,000 free of tax by way of selling their shares back to the company (share buy-back). This is generally done in association with a succession plan. There are strict rules associated with share-buyback but it can be an attractive option in some cases where money has accumulated in the company.
Transferring land to company
It is not necessary to transfer one’s land to the company. In the vast majority of cases the land is leased or rented to the company, or its use granted to the company free of charge depending on the particular circumstances.
In certain circumstances, it may be beneficial to sell land to the company in order to release cash or, if one is buying land it will generally be bought by the company as the after-tax cost of buying land personally may be prohibitive.
Incorporation should be no impediment to succession. In fact, it can present an opportunity to phase in succession as you now have two entities, the company and the land. The successor can initially be given a share in the company to give him/her a measure of involvement and responsibility eventually leading to land transfer when the time is right. The main capital tax reliefs such as Agricultural Relief, Business Relief and Retirement Relief are still available under a company structure.
Suitability tick boxes
If you are paying tax at the high rate but cannot tick all of the boxes you should get an independent assessment of your suitability for incorporation particularly focusing on the boxes that you cannot tick.
■Are paying tax at the high rate?
■ Have you moderate to low levels of debt?
■ Have you moderate levels of personal drawings?
■ Have you used up most of their Farm Buildings Allowances?
■ Are you contemplating land purchase?
■ Are you considering embarking on a succession plan?