TAXATION ADVISORY
FARMING AS A LIMITED COMPANY
BENEFITS OF COMPANY VERSUS FARMING AS A SOLE TRADER
Rate of Tax
The company tax rate on trading profits is 12.5% compared with a tax rate of up to 55% (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.
| Example: | ||
| The table below shows that a company requires to earn €1,143 pre-tax to repay a €1,000 loan while an individual must generate €2,222 before tax. | ||
| After Tax | Sole Trader | Limited Company |
| Gross before tax | 2,222 | 1,143 |
| Tax | 1,222 | 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. A comparison of the amounts qualifying for tax write-off for a person planning to retire at 65 years of age is as follows:
| Age Today | Sole Trader | Limited Company Pension (approx.) |
| 30 but less than 40 | 20% | 45% |
| 40 but less than 50 | 25% | 69% |
| 50 but less than 55 | 30% | 82% |
| 55 but less than 60 | 35% | 118% |
| 60 and over | 40% | 237% |
The increased level of pension contributions under the company structure allows for consideration of a Small Self-Administered Pension Scheme (SSAPS) and such schemes can now borrow in order to acquire assets while the income and gains within the pension fund are tax free. Compared with the conventional pension fund SSAPS members have greater control over the fund allowing a choice of investment: e.g.
- Commercial Residential Property
- Land
- Quoted Shares
- Shares in Private Companies
Limited Liability
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 in respect of bank borrowings.
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.
Double Charge to Tax
This arises where the company pays tax on its investment income and capital gains and the shareholder pays income tax on dividends or income received from the company.
| Example: | ||
| Calculation of combined Income Tax and Corporation Tax rates on a gain of €10,000 and investment income of €10,000 with balance paid to the individual shareholder. | ||
| Investment & Capital Gain | ||
| Corporation Tax Rate | 25% | |
| Earned by Company | 10,000 | |
| Corporation Tax | 2,500 | |
| Transferred to individual | 7,500 | |
| Tax on individual 52% (including PRSI/USC) |
3,900 | |
| Net Cash to individual | 3,600 | |
| Combined Tax Rate | 64% | |
The impact of the double charge to tax is an effective tax rate of 64%.
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. 20% of legitimate loans to directors must be paid over to the Tax Authorities.
Estate Planning - more complex
The Capital Gains Tax and Capital Acquisitions Tax allowances and reliefs 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. Unless there is a requirement for limited liability IFAC Accountants does not recommend a farmer with a marginal income tax rate of 20% to enter into the limited company structure. Some farm enterprises lend themselves to part of a farming operation being hived off into a Limited Company and this 50/50 option may also be explored.
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 the tax reliefs and pitfalls, their interaction between individual shareholders and the company combined with their interaction with farm support schemes and Estate Planning Reliefs.
THREE YEAR TAX EXEMPTION FOR START-UP COMPANIES
Companies commencing trading in 2012 are exempt from corporation tax, including capital gains tax, in each of the first three years to the extent that the value of the relief is linked to the amount of the employer’s PRSI paid by the company. The exemption does not apply to the following activities:
- A trade or part of a trade previously carried on by another person to which the company has succeeded.
- Land development, mining and petroleum activities.
- Companies providing certain professional services.
- Activities in the fisheries and aqua culture sectors.
- Primary production of agricultural products.
- Processing and marketing of agricultural products.
- Export-related activities.
- Where the trade is contingent on the use of domestic rather than imported goods.
- Activities in the coal sector.
- Road-freight transport operations.
- Undertakings in difficulty.
In reading this taxation section interpret the word "he" as meaning he or she and the law stated as at 6th December 2011 incorporating the 2012 budget proposals.
Disclaimer: The taxation content prepared by IFAC Accountants in this publication is intended as an aid to farmers and has been written in general terms and is intended as a guide only and is not intended to be a comprehensive statement of relevant law or regulation with its application to specific situations depending on the particular circumstances involved.
It should not be used as a basis of any conclusion drawn or argument made and the original legislation should be consulted at all times. Accordingly, the reader should seek proper professional advice if acting on any of the issues outlined in this publication and this publication should not be relied upon as a substitute for such advice. While every effort has been made to ensure accuracy, the author or publisher will not accept any liability for loss, distress or damage resulting from any errors or omissions.