When is the right time to incorporate your farm business?

For farmers with rising tax bills, forming a limited company to take advantage of the 12.5% Corporation Tax rate can look attractive, but incorporation should only be considered if you have explored all other options to reduce your tax bill within your present structure.

Deciding to incorporate

An advantage of the Limited Company structure is that profits can be retained within the business to facilitate expansion. Debts can be reduced, and a reserve built up to tide a company over poorer periods. Effectively, 87.5 cent of every euro trading profit is available compared with as little as 48 cent if you are in the higher income tax bracket paying a marginal tax rate of 52%.

If you are currently paying the top rate of Income Tax, then the pros and cons of incorporation should be considered.

Do you plan to expand your business?

Are your projected personal and non-farm expenses lower than the profits being generated by your farm and are they likely to remain lower in future?

Are any changes in farm management or ownership planned?

How you answer these questions will help decide if incorporation is right for you. Some matters to discuss with your accountant include:

• The level of tax being paid – are you hitting the high rate of tax on a large portion of income?

• What are your depreciation/capital allowances?

• Has income averaging been availed of?

• Are you paying family wages that will decline in the years ahead?

• What are your living expenses?

• Do you have further education costs?

• Have you thought about Succession?

• Are you paying into a pension to save tax rather than as part of a proper retirement savings plan?

• Are you strapped for cash with loan repayments, tax repayments, and living expenses?

• Does the farm need further investment that you are unable to fund?

Depending on how you answer these questions, particularly if you are a higher rate Income Tax payer and have taken advantage of all the available reliefs, then farming through a Limited Company could be advantageous for you and your business.

When discussing these questions with your accountant, it is important to consider the timing of any planned change in your business structure.

Company structure

Operating a Limited Company does not have to be more difficult or involve much more paperwork than other forms of business. However, it is vital to structure the company correctly to avoid problems now and when exiting the company in due course.

Exiting a company

It is sometimes thought that exiting the company is a tax expensive event, however, this can be avoided if the exit is carefully planned.

Where retained profits have accumulated, there are various options to extract cash. These include salaries, pension payments, retirement lump sums and selling some assets to the company in order to extract cash.

Contrary to common belief, farming through a Limited Company is not just for bigger farm businesses. If your profits have been rising and you have taken advantage of all opportunities to minimise your tax liability, then incorporation could be for you.

Before deciding to change your business structure, it is advisable to seek accounting and legal advice from professionals with expertise in the farming sector as incorporation will have lasting consequences for you and your business.