The number of farmers opting to trade through a company continues to accelerate. In 2013, the numbers of farmers incorporating in companies increased by 27%, compared to 2012.
There is an impressive five-year 300% increase in the number of farmer company incorporations per year when you compare 2013 to 2008.
The rise in marginal tax rates since 2008 has certainly added to the incentive for company incorporation. Back in 2008, the top level of personal tax amounted to 46.5%. In 2013, successful sole traders can pay up to 55% taxes on their marginal income, when income tax, PRSI and USC are included.
However, reasons for company incorporation are much more complex than a straight comparison of company and personal tax rates.
The question arises, why have farming companies suddenly become popular?
Prior to the enactment of milk quota regulations in 2008, it was not possible for a dairy farmer to transfer or otherwise lease milk their milk quota to a company.
As can be seen from the three-fold increase in the number of incorporations, this change in regulations in 2008 enabled many more farmers to incorporate their businesses, with dairy farmers now being afforded the opportunity to supply milk through their company.
Over the longer term, dairy farming has been consistently more profitable than almost any other farming enterprise, and the potential income tax savings from company incorporation are also generally higher, but by no means exclusive to this category of farmer.
Many farmers who had incurred expenditure in 2007 to 2009, during the era of farm waste management grants, had an option to claim the expenditure on these farm buildings over an accelerated three-year period, which reduced their taxable profits accordingly.
As these farm building allowances expired in 2010 to 2012, many farmers noticed their tax bills rocketing — and company incorporation was one of the main options available to reduce tax expenditure going forward.
With many farmers having ambitions to meet Food Harvest 2020 production expansion targets, and in an era where credit availability to farmers is reducing, many dairy farmers recognise that they will need to expand their businesses from their cash flow. Company incorporation can work particularly well in these circumstances, with company profits taxed at just 12.5%, leaving 87.5% of retained profits left over for reinvestment and growth.
The increasing interest in farming companies also stems from an era of increasing volatility in milk price, as well as our inefficient tax system to cope with such volatility. With farm commodity prices having doubled or halved in the ’09-’13 period, depending on your enterprise, farmers recognise than price risk is a real threat to the sustainability of their business.
In short, farmers need to be able to stockpile cash resources in good years, so they can weather storms of poor prices. Volatility is a new phenomenon to Irish dairy farmers, who were for many years protected and at the same time stifled by EU quotas, intervention, and other market manipulation measures. But volatility is here to stay, because Irish farmers must soon deal with the full force of global markets. The key is to have enough firepower to weather periods of poor prices.
Income averaging has been available as a tax tool for Irish farm families, however this tax measure often compounded farmers’ problems, and many would have suffered less of a cash flow headache without income averaging. In a poor year, with poor prices, a farmer was often exposed to taxes based on the average profits of the business.
Other countries have addressed this issue, allowing farmers to store up funds in a ring-fenced, tax-free manner, which they can draw down as taxable income, which by its very nature supported self-sufficiency in times of crisis.
Company incorporation overrides the inadequacy of our income averaging rules, with profits retained in the company taxed at a flat 12.5%, in good years or bad. Similarly, at family level, a farmer can stabilise family earnings with a company, making a decision to take an average wage from the business in good years and bad.
Looking at these factors, it’s not surprising that the number of company incorporations continues to grow strongly into 2014.
Going down the farming company route is a major business decision. There are significant tax implications following on from incorporation, and professional tax advice should be obtained in advance of such a move.
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