Kieran Coughlan: Some good news from the taxman on livestock leasing
This is the first such tax briefing by Revenue specifically on animal leasing — in itself a reflection of the changing nature of farming.
The concept of leasing out animals may border on the absurd for most of us farmers, however this is much more common in other parts of the world, and if it works there, surely we should consider if there is a place for it in Ireland.
From a financial perspective, leasing can be broken down into two separate forms — these being a finance lease or an operating lease.
Breaking down the jargon, on a practical basis, the majority of us are very familiar with operating leases, for example when we hire a power washer from a tool hire centre, or when we hire a rental car on holidays; these operating leases don’t transfer any rights of ownership, and are simply a pay-as-you-use type service.
Meanwhile, most of us are familiar with finance leases too, for example buying a new tractor or farm machine under a finance lease. Again, technically there is no transfer of ownership during the lease, but usually there is a buy-out option at the end of the lease for a nominal fee.
In terms of animal leasing, in an Irish context, the current over-quota situation suggests there could be an opportunity for dairy farmers who are over-quota to transfer or lease some of the cows to under-quota farmers, on a temporary “operating lease” type basis, resulting in a win-win situation, avoiding superlevy, reducing feed costs, and generating some level of income until the quota deadline finally passes.
The good news from the tax briefing is that Revenue will deem income from cow leasing by a farmer who continues farming to be farm income. From a tax point of view, this has many advantages, including the following:
* The farmer can continue in income averaging, if relevant.
* The farmer can offset farm expenses against cow leasing income in calculating taxable profits.
* Any farm profits arising can be sheltered by pension contributions, where relevant, unlike rental income.
* Only one set of accounts needs to be kept.
From a VAT point of view, leasing of animals is a bit tricky. For an unregistered farmer (the most common form in the dairy industry), any income from leasing cows is not subject to VAT, so long as that farmer is not in receipt of lease income and/or other potentially “VAT-able” income, such as contracting income, totalling more than €37,500 per year.
Where income from cow leasing and other agricultural services is expected to exceed €37,500 per annum, the farmer is obliged to register for VAT, with VAT at a rate of 23% applicable.
Looking abroad, cow leasing is a complete business of its own.
Operators such as the Australian Moo & You & CowBank have leased thousands of cows over many years to expanding farmers. These operations are mostly of the “finance lease” type, enabling a farmer to effectively buy cows over a period of time, without having all of the upfront costs.
Closer to home, the French Association AFIC has also been active in the cow leasing market, with a track record of over 30,000 cows leased to 800 farms.
With these arrangements, the finance company steps in to provide finance, take legal ownership of the stock, and generate a lease income from renting the cows to the farmer.
From an Irish perspective, the tax advantage of leasing is that the lease payments are deductible expenses in calculating taxable profits. In contrast, a farmer who increases his herd by buying direct may in most instances claim only 25% of the costs of his stock purchases as a tax deduction, under our stock relief tax rules.
Application of VAT at 23% places a high cost on any would-be finance company looking to enter the market for financing cow purchases.
This high rate of VAT doesn’t compare well with the 4.8% VAT rate which would apply on a straight purchase, adding an extra cost for unregistered farmers.
Meanwhile, Teagasc have published a draft cow leasing agreement which is available from their website, which provides a very useful template for any farmer considering either leasing out or leasing in extra cows.
