Advice – The Limitations And Benefits Of Forming Farm Companies

Switching to limited company status can deliver tax savings but it is only suitable for a minority of farmers

Many larger farming operations have switched to limited companies at this stage and most appear to be happy with their decision.

All of the initial teething problems, particularly Department of Agriculture-related issues which could have put people off, have long been sorted and a decision to incorporate now should be down to whether it is a viable option from a taxation perspective.

There is, however, still a significant cohort of farmers who might not regard their operations as very large, but nevertheless have relatively large tax bills and it is among this group where a lot of people are toying with the option of incorporation.

Undoubtedly some could clearly benefit by incorporating, but are a bit nervous and are not sure if it’s the right thing to do. Some tend to think that incorporation is only for very large farmers, or maybe they feel they are too old or they have no identified successor.

This was brought home to me recently when I was asked to address a group of farmers on the broader questions of incorporation. It became evident that many were ideally suited to incorporation, but either their accountants or they themselves had dismissed the idea for reasons they were not quite sure of.

That said, in terms of overall farmer numbers, incorporation is for the few and there are many who are contemplating company formation that would be best advised to stay as they are. The primary reason any farmer should consider incorporation is taxation. All other reasons are secondary and are an added bonus if they apply. Taxation is obviously a function of profit, and a question that I am frequently asked in this context is where on the profit scale does incorporation enter the radar? Before I address that question, it is important to consider the various obstacles or indicators that might point in favour or against incorporation.

 

Points in favour

* Currently paying tax at the high rate.

* Have moderate levels of personal drawings.

* Have used up most of the available Farm Buildings Allowances.

* Are not participating in a Succession Farm Partnership.

* Have not drawn certain TAMS grants in the past five years.

* Intend to purchase land.

Points against

* Other options are available towards reducing tax bill.

* Have high levels of personal drawings.

* Have recently invested significant sums in farm buildings.

* Have plans for a significant investment in farm buildings.

Participating in a Registered or Succession Farm Partnership.

Have drawn certain TAMS grants in the past five years.

* Intend to cut back or retire in the medium term, say five years.

If all of the points in favour apply and none of the points against are relevant, well then you need to have your tax adviser assess the tax savings that should apply over the next five years or so based on reasonable assumptions.

In doing so, he/she will first have to consider alternative remedies to reducing your tax bill, such as maybe a family partnership or investing in a personal pension. If, having appraised all of the options, you consider the tax savings sufficient to justify changing over, then go for it.

This takes me on to addressing the question of what size of taxable profit or how much of a saving would justify company formation?

The answer will of course vary from case to case depending on your circumstances and, in particular, your personal drawings.

However, taking a ball-park view, I’m inclined to suggest that if the apparent tax savings are likely to exceed €5,000 per year, it is hard to argue against it.

In a fairly typical situation, this would suggest a profit threshold of €55,000 for a farmer with just the single person’s tax band and no off-farm income (see case study 1), but this figure would rise to €75,000 for a married couple with no off-farm income and annual personal drawings of say €45,000 (see case study 2).

 

The primary reason any farmer should consider incorporation is taxation. All other reasons are secondary and are an added bonus if they apply

The primary reason any farmer should consider incorporation is taxation. All other reasons are secondary and are an added bonus if they apply

Case Study 1: Profit threshold of €55,000

John is 50 years old, is earning a taxable farm profit of €55,000 and his wife Mary is working full time off-farm, earning €36,000 p.a. Personal drawings from the farm are €26,000.

Current tax position

John has a liability to Income Tax, PRSI and USC of €16,213. A possible mitigation measure would be for John to pay the maximum allowable 30pc of his profit (€16,500) to a personal pension, resulting in a tax saving of €6,600, thereby reducing his liability to €9,613.

Tax liability in a company

In order to fund the net personal drawings requirement, John will need a salary of €32,000 from the company, which will result in him paying €5,603 in income tax, PRSI and USC. If we assume that John continues to pay €16,500 into a company pension scheme, the farm company profit will then be €13,000 after deducting John’s salary and pension contribution, which will create a corporation tax bill of €812, resulting in his total liability being €6,415. Mary’s tax position is unaffected by the company formation.

Summary

By forming a company, John’s overall tax saving is €6,600, assuming he makes no pension contribution. However, if he were to exercise the pension option, the tax saving would be reduced to €2,062. John’s case is marginal, but if the pension contribution option was to be exercised, it is hard to see how company formation could be justified. This example would support the suggestion that where the taxable farm profit is below €55,000 for a farmer on the single person’s tax band, incorporation is on the margins of being a viable option.

 

Case Study 2: Profit threshold of €75,000

Married couple, Peter and Joan, are 45 years old and trading as a 50:50 partnership. They have no off-farm income. The taxable farm profit is €75,000 and personal drawings from the farm are €44,000.

Current tax position

Peter and Joan’s liability to income tax, PRSI and USC is €16,202. A possible mitigation measure would be for both to pay the maximum allowable 25pc of the farm profit (€18,750) to a personal pension, resulting in a tax saving of €4,687, thereby reducing liability to €11,515.

Tax liability in a company

In order to fund the net personal drawings requirement, Peter and Joan will need gross salaries of €26,000 each from the company, which will result in them making a combined payment of €7,726 in income tax, PRSI and USC. If we assume that they continue to pay €18,750 into a company pension scheme, the farm company profit will then be €12,250 after deducting both salaries and pension contributions, which will create a corporation tax liability of €1,531, resulting in their total liability being €9,257.

Summary

By forming a company, Peter and Joan’s overall tax saving is €4,351, assuming they make no pension contribution. However, if they were to exercise the pension option, the tax saving would be reduced to €2,258. Similar to John in Case Study 1, Peter and Joan’s case is marginal, but if the pension contribution option was to be exercised, it is hard to see how company formation could be justified. Again, this example would support the suggestion that where the taxable farm profit is below €75,000 for a married couple with no off-farm income, incorporation is on the margins of being a viable option.

(Source – Irish Independent – Indo Farming – Martin O Sullivan – 06/02/2020)

 

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