FARMING AS A LIMITED COMPANY - POTENTIAL TAX SAVINGS AND PITFALLS
"Recent changes to tax credits, the introduction of income levies and the universal social charge, and the upward trend in farm incomes means many farmers should review their tax structure. In cases where significant tax liabilities are arising on an annual basis or are likely to arise in the coming years as a result of decreased allowances and increased taxes, farming under a limited company structure should form part of this review."
This was stated at the recent IFAC Accountants Client Workshops held nationewide.
I have outlined in summary, the main advantages and disadvantages of farming under a limited company structure. It is important to note that while the significant tax advantages are attractive, a limited company structure is suitable for only a minority of farm businesses. A detailed review of your individual circumstances should be undertaken prior to entry into this structure. Professional legal and tax advice are crucial to making a well informed decision.
ADVANTAGES OF COMPANY STRUCTURE
Rate of Tax
The company tax rate on trading profits is 12.5% compared with a tax rate of up to 52% (income tax and levies) for an individual.
Ability to repay loans
The company tax rate of 12.5% leaves 87.5 cent from every euro trading profit retained in the company for development/loan repayments compared with as little as 45% when trading as an individual sole trader.
The table below shows that a company requires a pre-tax profit of €1,143 to repay a €1,000 loan while an individual must generate a pre-tax profit of €2,222 to meet the equivalent loan repayment.
|After Tax||Sole Trader||Limited Company|
|Gross before tax||2,222||1,143|
|Available for loan repayment||1,000||1,000|
Better tax write-off for pension contributions
By far the most common method used by Irish business people to extract money from companies is by having the company provide for a personal pension plan for the Director/s.
A benefit to be derived from using a limited company is the more generous tax treatment afforded to company pension plans compared with self-employed pension plans.
Where a Limited Company is unable to pay its debts the promoter's exposure to these debts is limited to the amount of the called-up share capital. In practice we find in many cases limited liability is diluted due to banks insistence on securing personal guarantees from Directors for bank borrowings. Where bank loans are being transferred to a company the bank may use this as an opportunity to amend/claw-back any favourable loan rates which would be a disadvantage.
DISADVANTAGES OF COMPANY STRUCTURE
Higher Company Tax Rate on Investment Income
The tax rate on investment income arising within the company is 25% and if not distributed to shareholders within 18 months becomes liable to a surcharge giving rise to a total tax rate within the company of 40%.
Withdrawing Money from the Company
In most cases, the transfer of company money to an individual is taxable as income in the hands of the Director/Shareholder. This is by far the hardest concept for a business man to accept i.e. "it is my money, why can't I withdraw it as I wish?"
This lack of flexibility arises because the company is a separate and distinct legal person from the shareholders who own it. Recent budgets have contained specific anti-avoidance provisions to counter tax-avoidance schemes including those aimed at extraction of money from a company without the recipient paying income tax.
Prohibition on excess Company Loans to Directors
"Surely I can get a loan from my own company!!"
Company Directors and Shareholders are prohibited by law from receiving loans totaling 10% or more of the company's net value. Given that, in the vast majority of cases, the land will not be within the company 10% of net worth may not be a very large amount. Infringement of this law is an indictable offence and must be reported by the Auditor to the Office of the Director of Corporate Enforcement.
Estate Planning - more complex
The Capital Gains Tax and Capital Acquisitions Tax allowances and relief’s are more complex and restrictive than those applying to a sole trader individual wishing to transfer his farm land and farm business to the next generation.
Additional Compliance Costs
Servicing a Limited Company is more expensive than looking after the affairs of a sole trader. There are additional accounting, auditing and legal requirements relating to Limited Companies and the additional costs will arise in the areas of initial suitability assessment, company formation, annual audit/audit exempt accounts, annual filing requirements, company secretarial compliance and the need for ongoing specialist taxation advice.
Loss of Confidentiality
A small Irish registered company is obliged to file a copy of its balance sheet with the Companies Registration Office and the balance sheet is open for inspection by the public.
Major Benefits for Higher Rate Tax Payers
There are major tax saving benefits to be derived by higher rate tax payers. Such savings will depend on the directors requirements for living and personal expenses in the short to medium term and a sound viable and clear plan for utilizing the after-tax profits within the company.
Personal Money is far better than Company Money
The tax-efficient extraction of money from a company is fraught with problems thereby supporting the sound and wise maxim that personal money is far better than company money because you can access it without any major tax or legal consequences. We recommend that the company option should be considered when all available tax planning mechanisms both inside and outside the farm gate have been exhausted and the profits are taxable at the higher marginal tax rates. The decision to use a Limited Company in farming requires back-up support knowledge on tax reliefs and pitfalls, their interaction between individual shareholders and the company, the current impact and likely future impact on EU and National Farm Support Schemes and Estate Planning Reliefs.