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TRADING AS A FARMING COMPANY
Kevin Connolly
Financial Management Specialist
Teagasc Rural Economy and Development Programme (REDP)
Teagasc Pig Farmers’ Conference 2014
Cavan Crystal Hotel
22nd October 2014
Setting up a farming company
Selected reasons given for company setup…
Teagasc advise early discussion with
accountant & solicitor
I’m paying
too much tax!
I need to invest in the farm and I will
struggle to have the cash to meet
repayments on debt and pay tax
I think there are some benefits in
boosting my pension so I can rely on it
rather than any income from the farm
after I hand over & retire
Everyone else seems to
be doing it…
A company is..
….a separate legal entity
You are not the farmer – the company is!
Business profits belong to the company first!
Company will have its own bank account
All business expenses invoiced to the company
You become a shareholder / director
Director duties
Key questions
Are you paying the top rate of tax?
Are you maximising all available reliefs and allowances?
How much of your annual business profit do you
need to withdraw as personal drawings?
Monies paid out to directors of the company (salary) is
subject to personal tax rates in the hands of the directors
If you need substantial drawings from the business you
will be paying top rate tax on this anyway
– lessens the tax advantage of a company
Is there off-farm income which reduces demand on farm
cash for personal use?
Key questions
Are you looking at sustained (& increasing) high business profits? A short period of high profits (+ low drawings) may not justify
forming a company
Are you planning business expansion? High company retained earnings (after paying corp. tax of
12.5%) can be used to fund this with less cash flow pressure
There is a larger benefit if you intend purchasing land and leaving it in the company
No Capital Allowances on land investment
Repaying Debt
Sole Trader
Pay 40% tax + 4% PRSI +
8% USC
before capital repayment
To repay €20,000 principal
requires €41,666 profit
Company
Pay 12.5% tax
before capital repayment
To repay €20,000 principal
requires €22,857 profit
Assets used by the Company
- Land Land leased by farmer to the company
No Stamp Duty & no immediate CGT implications
No leased income exemption available
Land Sold to the company This is a chargeable transfer of an asset
Possible CGT liability for the owner AND Stamp Duty for the company
Company borrows money and pays farmer
An option if large personal debt exists
OR
Directors loan created on company balance sheet
Director can draw down on this as cash builds up in the company
Assets used by the Company
- Livestock / Machinery
Livestock & machinery transferred at book value
– no additional income tax on transfer
No stamp duty or CGT applies on these transfers
Plan in advance of company set up to increase
the value of these transferred assets
Loans & Security
Can existing loans be transferred to the company?
Yes but the underlying asset may also have to be transferred (Stamp Duty & CGT??)
New loans terms will be set up by the lender – how do these compare with current terms?
Loans kept outside the company Repayments will have to be made out of company
transfers/ payments to the owner
These transfers will be subject to personal tax rates
Repayments will have to be covered from after-tax cash – benefits of low company tax will be lost
Making the switch
New company has a separate legal status
Ceasing as a sole trader &
Commencing as a company
Implications
Revision of tax bill for previous year due to ceasing sole
trader business
Implications for farmers on income averaging
If stock value in the books is low there may be a large
once off tax bill, might offset this with pension payment
Succession & Farming Company
CGT Retirement Relief issues
CGT Retirement relief available on land leased to the company if company shares + the land are disposed of to the same person
Transfer of company shares – retirement relief available but watch 10 year rule
Capital Acquisitions Tax
Farming company shares not “agricultural property” – creates problems for Farmer Test for Agricultural Relief
Business Relief may be available on the shares
If retirement is planned in the near future then it might be better to stay as a sole trader
Company Tax Rates Two rates of tax apply to companies
Basic corporation tax rate – 12.5%
Applies to trading profits
Passive tax rate – 25%
Applies to passive income – investment and rental income
This income can’t be allowed build up in the company indefinitely – 20% surcharge applies if not distributed with 18 months
- ie the income on retained earnings (DIRT type of tax)
VAT – company can remain unregistered and claim 5.2% flat rate addition
Getting money out
Annual salary
Subject to PAYE, PRSI & USC
Company repaying directors loans
Loans are created when director transfers
assets to the company for no payment
These loans can be withdrawn tax free at any
time
Pension Payments
Company can make contributions to
directors pension
Small Self Administered Pension
Less restrictions on maximum amounts
Pension contributions made are generally
fully deductible against company profits
Company Paperwork
Annual accounts to be prepared
Usually higher accountancy cost
Accounts filed with Companies Registration
Office
Form B1 – accounts summary attached
Annual Tax Returns
Corporation Tax Return CT1
Directors must file a separate return Form 11
The company route..
Is it worth looking at???
High personal tax rates – 55% for > €100k
Capital allowances exhausted
Planned further expansion investment
No Capital allowances / high borrowings needed
Large debt – unable to make sufficient principal
repayments due to tax
No business transfer planned in the near future
TRADING AS A FARMING COMPANY
Kevin Connolly
Financial Management Specialist
Teagasc Rural Economy and Development Programme (REDP)
Teagasc Pig Farmers’ Conference 2014
Cavan Crystal Hotel
22nd October 2014
