Company incorporations by farmers continue at pace.
Figures from the Department of Agriculture show that over 2,500 Irish companies were beneficiaries under the EU’s Common Agricultural Policy (CAP) for funding in 2019.
Over 1,200 of these companies received CAP payments in excess of €30,000 each.
The reasons to incorporate are many and varied, but perhaps the most widely known benefit of incorporation is the capacity to have farm profits taxed at a rate of 12.5% rather than potentially over 50% of income tax on farm profits earned personally.
The tax differentials can be significant, however incorporation may not be a cure-all.
The tax savings of having profits taxed at company level can only subsist where the business has the capacity to retain profits in the company, usually for future expansion.
If the business profits are modest, then the tax savings from incorporation will be proportionally modest.
Where owners have high personal debt, that will ultimately need to be serviced from business profits, then the benefits from incorporation may be temporary, because business owners may need to withdraw profits from the company to service such debt.
Dairy farmers, some of the larger beef and tillage farmers, have incorporated, as have a high proportion of large scale agricultural contractors.
Other key benefits from incorporation include
1) separation of personal from business assets.
2) levelling out of the effects of income volatility on personal tax positions.
3) capacity to grow the business tax-efficiently, without the burden of high income tax.
4) ability to split a business amongst two or more successors.
5) better legal structures for resolving disputes for shareholders, than a partnership.
6) a company business can live beyond its founders, and may be more easily sold.
7) the opportunity to avail of limited liability.
8) lower stamp duty on the transfer of company shares rather than land.
9) potentially higher pension contribution capacity, in the case of directors.
10) capacity to extract tax-efficient windfalls from the company on retirement.
Of course, the decision to incorporate a farm is a significant one, and very careful consideration should be given to the tax implications in the short, medium and long term.
For example, where a farmer incorporates a company and transfers their farming trade to the newly formed company, they will be deemed to have ceased farming, which could result in an opting-out penalty under income averaging.
The sale of stock and machinery by the farmer to their company can give rise to taxable income if not properly planned, and perhaps worst of all, the change to a company could result in the farmer losing their ability to transfer their farm in the future to a successor without incurring capital gains tax.
There are some other downsides to company incorporation, such as higher accountancy fees due to extra compliance requirements, such as Companies Registration Office filing requirements, and additional insurance costs, where lands owned personally are insured as owner, and separately insured by the company as occupier.
The benefits of incorporation are best associated with trading income, in the case of non-trading income, such as rental income earned by the company, the effective corporation rate tops out at rates of up to 40%, making incorporation unsuitable for such activities.
These are just some of the potential pitfalls. However, with tax planning, some or all of the pitfalls can be mitigated, leaving a farmer who has incorporated no worse off than they were as a sole trader, yet with the benefits of incorporation.
In deciding whether incorporation is the right move, business owners should consider the following factors:
1) What farm profits have been earned over recent years, and what is the likely trajectory of farming profits over the medium term?
2) What capital allowances are available, based on previous expenditure, and what level of capital expenditure is likely to be incurred in the medium term?
3) Are there successors?
If so, what is the expected timeline for transitioning the business to a successor?
4) If there is no successor, what is the long term plan vis-a-vis continuation of the business?
5) What is the amount of personal borrowing of the business owners, and how much of the debt can be serviced as a result of selling assets to the company (creation of directors loan)?
6) What assets are to be transferred to the company, and at what values?
7) Are there clawbacks of any taxes (including examination of any reliefs claimed under capital gains tax, capital acquisitions tax, VAT, and income tax) that need to be repaid as a result of incorporation?
8) Are basic payment scheme entitlements to be sold or leased to the company, and what are the VAT implications of same?
9) What level of rent is to be charged from the landowner to the company, and how long should the lease be?
10) Is now the right time to incorporate?
The recipe for a successful transition from sole trader to company must include an examination of the reasons for incorporation, and the likely long term benefits from incorporation, while all the time minimising any pitfalls at the point of incorporation and in the longer term.
Farmers considering setting up a company should obtain professional advice relevant to their own circumstances.
- Chartered tax adviser Kieran Coughlan, Belgooly, Co Cork.
- (www.coughlanaccounting.com)
