Kieran Coughlan: The dos and don’ts when it comes to farming companies
Having a full overview of both the positives and the negatives of using a company means one can give proper consideration as to whether it is the right choice and avoid - or at least understand - any potential nasty surprises.
As covered here last time, now is a particularly good time of year to consider whether a farming company has any merit for you, and this year, more than most given the profile of farm profits that were earned in 2024, and fingers crossed the profits for 2025 will be improving above those levels.
Setting up a farming company isn’t overly complicated; indeed a farming company can be set up within a week if so desired.
Teasing out the specifics of your farm, where you are at in your farming career, where your profits are at and are likely to go to, and your ambitions for growing your business takes time.
The time isn’t so much in spelling out the rules or even weighing up where you are at, but time is needed to mull it over and ensure it sits well with you. Understanding where a farmer's profits are at and heading to is a critical first step.
If the farm profits are taxable at the lower rate of tax and likely to continue to be taxable at the lower rate, then there is little value in incorporating a farming company where the tax saving is only around 16% moving from 28.5% to 12.5%.
Whilst there are some tax savings in this scenari,o the reality is the additional costs associated with meeting additional accounting requirements will eat into that saving.
In any event, where farm profits are taxable at the lower rate, generally, a farmer will want to have the use of all of these profits to meet their personal living costs, which are called 'drawings' for accounting purposes, and the advantages of incorporation in these circumstances are questionable.
Where a farmer has high profits and relatively low debt repayments and drawings, company incorporation can be a real winner as the saving from paying tax at 12.5% versus 52% is significant and allows for profits to be accumulated at pace in the farming company.
This presents an ideal scenario for farmers wishing to use accumulated profits to grow their businesses. Where a farmer has higher profits and high personal debt repayments, company incorporation can give some relief in that the tax saving from incorporating a company can release cashflow enabling the farmer to better meet their debt repayments but accessing funds from the company in order to meet personal debt obligations needs to be carefully managed via what is known as a directors loan.
On setting up a farming company, the farmer will usually sell their equipment and machinery, stock and farm payment entitlements to the company. The company doesn’t have any funds to pay the farmer for these items, and instead, an I-O-U is created, with the company owing the farmer for these items.
As the company trades and hopefully accumulates savings, the farmer can access these funds and draw them out for him or herself, with the underlying tax on accessing these funds being as low as 12.5% structured correctly.
Overdrawing out funds from the company beyond what one is entitled to is called a 'negative director’s loan', i.e. a director ends up in a situation where they owe money to their company, and this has negative legal and company law consequences and should be avoided at pretty much all costs.
The ‘do’ in this case are understanding the tax implications and tax options of selling assets into the company, understanding how much one’s directors loan amounts to, how much you are or intend on drawing down per year and understanding what the ramifications are when the directors loan expires.
When setting up a farming company do get good advice on what the tax implications are for both you and the company. Whilst the income tax versus corporation tax positions can be hugely attractive, it is critical to get a full understanding of all the tax implications, including potential capital gains tax and stamp duty on the transfer of some assets into the company, the implications for the long term transfer of the farmland to successors, the implications if there are no successors and the farm will be sold, the loss of some reliefs such as farm consolidation and farm restructuring relief.
All in all, I have yet to meet a properly informed farmer who has set up a farming company that has come to regret that decision, the key here is getting a full understanding of the process and the tax implications to allow for an informed decision.
