The pros and cons of putting the farm into company status
Q I am a young trained farmer and my father, having reached retirement age, has decided to transfer the family suckler farm to me.
The farm is returning a reasonable income but it would nonetheless require me to have a job off-farm in order to afford my own home etc. I intend to expand the farm and am considering a change to dairy which might give me a greater source of income so that I would not need to work off farm.
Am I better to put the farm business into a company structure or to operate it as a sole trader, as my father has done in the past?
A. For many young (or not so young) farmers starting out, there are two big issues which you should plan for prior to the transfer and commencing farming. The first centres around taxation, mainly capital acquisitions taxes which are gift and inheritance tax, paid on acquiring the farm.
The second issue that ought to be given consideration is the business structure in which you plan to operate. There are a few options open to younger farmers, including sole trader, limited company, unlimited company, partnership (registered and unregistered) etc. For the vast majority of farmers who are not engaging in a partnership the choice is between operating as a sole trader or operating the farm business in a limited liability company.
Most farmers chose not to operate an unlimited company as there is effectively no limit to the liability of the directors for the actions including losses of the business. The main advantages that an unlimited company enjoys are: (i) the company's tax returns are not available for the public to access, unlike a limited liability company (this condition will only be available until 2022) and (ii) the company pays corporation tax at 12.5pc currently which is the same as a limited liability company
Partnership and Limited Liability
The biggest difference between operating a business as a limited company and operating as a sole trader is the rate at which tax is paid on the profits. With corporation tax still resting at 12.5pc by comparison with the higher band tax rate of upwards of 50pc, it is certainly worth any farmer's time considering the pros and cons.
In recent years operating a farm business as a limited company has certainly become an option for dairy farmers as well as larger tillage and drystock farmers. The following are some of the main considerations involved.