Many farmers have diversified into off-farm enterprises over the years, and this will continue into the future. But what is the most efficient way to deal with tax for these enterprises?
The increase in personal tax rates for self-employed individuals to the point where it is now as much as 55pc. This makes structuring a person's affairs through a company structure, whereby trading income is taxed at 12.5pc, more attractive than ever. However, the decision is not as simple as that.
If you decide to go with a non-corporate structure, you remain a sole trader or a partnership if two or more people are involved in the business. Trading profits will be taxable at a person's marginal tax rate -- as high as 55pc.
Trading losses incurred by a sole trader, a partnership or a co-ownership can generally be set off against other income, such as a salary, rent, or farm profits. For example, if you incur a loss from an off-farm enterprise, you can potentially shelter some or all of your rental income from land. This is subject to the proviso that you are actively engaged in the management of the off-farm enterprise and not merely a passive investor in the business.
As a sole trader, you will be required to register for income tax as a self-assessed person with Revenue. Registration as an employer will also be required if you employ anybody. VAT registration will be required where the turnover from non-core farming activities, such as agricultural contracting, is likely to exceed the thresholds.
The thresholds are €37,500 per annum in the case of the provision of services and €75,000 in the case of goods. If you find yourself in a position where you are required to register for VAT in respect of an off-farm enterprise, you will also be required to account for VAT on your core farming activities. Therefore, you will no longer be regarded as a flat-rate farmer. Registration under each tax head can be achieved by filing a Form TR1 with Revenue.
Under a corporate structure, profits should be subject to tax at 12.5pc. However, there is a higher 25pc rate of tax in the case of investment income and there may be a 20pc surcharge levied on any investment income not distributed by way of dividend.
In this scenario, you would be a shareholder or director of the company so any funds extracted from the company by way of salary or dividend will be subject to marginal personal tax rates. However, if you have invested in the company by way of a director's loan, repayment of this loan by the company may be made tax free.
Under a corporate structure, limited liability is available in the case of limited companies. However, banks will often look for personal guarantees in respect of loans or money that the company owes. There are also more attractive pension options available under a corporate structure. An employer can make much higher contributions than a self-employed person, and your contributions are not subject to a benefit-in-kind. As a result, the company should receive a full tax deduction in respect of the payment. Pension funding is an attractive means of extracting funds from a company.
Issues to consider before setting up a corporate structure include increased set-up and annual compliance costs, particularly if a statutory audit is required. Transfer of the business, whether to family members or others, is more complicated. If the enterprise is using farm land and buildings, consideration will need to be given to charging a market rent to the company with resultant tax consequences.
Tax registration will be required as with a non-corporate structure and can be achieved by filing a Form TR2 with Revenue.
Commencement to Trade
A decision will need to be made when commencing to trade as to whether the trade should be operated through a corporate or non-corporate structure. In some cases losses will be incurred in the initial years of trading. As trading losses can generally be offset against other income, it may be worth considering commencing to trade under a non-corporate structure, potentially incurring losses in the early years, and then incorporating the business once the business starts to become profitable. In that way start-up losses could be used to shelter other income and the lower corporate tax rates applied when the business becomes profitable.
Transfer to a Corporate Structure
Any incorporation of a business will involve a number of tax and other implications as there is likely to be a transfer of assets such as property and plant and machinery, together with a transfer of employees. There may also be a disposal of goodwill from the sole trade/ partnership/co-ownership to the company. These would need to be considered carefully prior to any incorporation decision being made, as there are potential tax charges arising which can be avoided with careful planning and use of available tax reliefs.
Aidan O'Boyle is a manager in Grant Thornton's taxation unit