I have been getting an increasing number of calls this autumn on moving to a limited company. It is easy to just look at the 12.5% tax rate and rush in, but limited companies are certainly not for everyone. The decision needs careful consideration and a lot of planning to do properly. I would argue that it takes up to two years of planning to really get the transition right.

According to Declan McEvoy, head of tax at IFAC, the interest they are seeing is largely from farmers who have invested in buildings, but are now running out of capital allowances, and dairy farmers with a large tax bill on the horizon after good prices and high output in 2017. Interestingly, he said banks are looking for farmers to incorporate particularly where there is land purchased and large borrowings.

Each farmer has to look carefully at their own situation – both now and in the future – and get good advice.

To really make the decision, Declan said a five-year plan for the business needs to be done. It will answer key questions like:

  • • What is the tax position over the five years?
  • • Is there expansion on the cards that involves capital expenditure?
  • • What is my capital loan repayment profile?
  • • Have you already drawn Tams II and have further to draw down?
  • • What are your living expense requirements?
  • • What are your current liabilities and what would your director’s loan stand at?
  • • Do you need to transfer assets –other than stock and machinery – to boost the balance sheet?
  • • Have you thought about succession, and could you bring the successor in as part of the move?

    • Main Advantage

    The 12.5% corporation tax on trading profits means for every €1,000 profit in the company €395 is sheltered from tax. This is the difference of the marginal rate of up to 52% for the individual farmer earning over €32,800 and the corporation tax rate of 12.5%. (52%-12,5%=39.5%)

    This comes into its own when farmers are expanding and have loans inside the company. If you require bank borrowings to fund future farm development/expansion, land purchase and so forth, any such borrowings are paid back to the bank from after-tax income.

    Don’t get confused with interest payments, which are tax deductible. Capital repayments are not tax deductible. Therefore, if Fred is to repay the €250,000 loan and – assuming he may be paying income tax rates up to 52% – he would need to earn €520,833 before tax to repay these borrowings.

    However, if trading as a company, the company would only need to earn €285,714 before tax, to repay these borrowings. That’s a difference of €235,118.

    Disadvantages

    Some farmers find it difficult to get their heads around the fact that the company is a separate entity, and the money inside is not technically theirs. This adds another layer of paperwork for farmers. In most cases, accountancy fees will be double what they currently are.

    Income averaging is not an option for a limited company. The impact of income averaging over five years should be carefully looked at first. A tax bill can also be triggered when a farmer goes from income averaging into a company. Careful tax planning can avoid this.

    When there are outstanding loans outside the company, the income to pay them will be inside the company. The money you take out to repay capital will attract income tax at the marginal rate. Again, planning is vital to avoid this.

    A company creates a complication for succession planning. In general, the tax rules applying are slightly more restrictive, complex and less generous for the company structure than individual farmers. Again, this has to be carefully planned.

    Who should set up a company?

    Farmers who should consider setting up a company are those who:

  • • Do not/will not need a significant portion of their farm profits for living expenses/drawings each year – most common where there is off-farm income.
  • • Are already paying significant income tax.
  • • Have more than 10 years left before they retire.
  • • Plan on expanding their business over the next 10 years and require borrowings to fund expansion.
  • • Have already exhausted all other tax reduction options, for instance family wages, spouses credits and so forth. CL

    • Limited Company Booklet

    An in-depth 41-page booklet on Limited Companies will help identify if it is the right option for you. Written by Peter Young, Irish Farmers Journal and tax experts Declan McEvoy and Paddy Cowman, IFAC, it gives a comprehensive guide to the many aspects of limited companies for farmers. It sets out the pros and cons of a limited company and identifies how you should first minimise tax outside the company.

    Case studies look at the key decisions to be made and, if you do make the decision, it outlines the planning steps needed to make the move. The important role of directors is set out, along with your company registration and legal requirements. Will and succession planning is also dealt with in detail, and the use of pensions in a limited company is examined.

    The booklet is a must for anyone wanting to make an informed choice for their business or clients. The price is €15 including postage. Call (01) 419 9525 to order.

    >> Succession-planning workshop

    Start the conversation early:

    one-day workshops

    There has been strong interest in the succession planning workshop being organised by the Irish Farmers Journal and Succession Ireland.

    The first date is on Tuesday 14 November in The Lakeside Hotel, Killaloe, Co Clare. The second date is on Wednesday, 22 November in Knightsbrook Hotel, Trim, Co Meath.

    The price is just €150 per person or €250 per couple for the day. This includes lunch, teas/coffees and a workbook. Places are limited and couples are encouraged to come.

    Special deals for dinner and B&B at the hotels for the night before or after the workshop are offered.

    To book a place in either venue call (01) 419 9525 or visit www.farmersjournal.ie/booking.