TRADING AS A FARMING COMPANY

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2 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 22 nd October 2014

3 Setting up a farming company Selected reasons given for company setup 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 I m paying else seems to too much be doing tax! it I need to invest in the farm and I will struggle to have the cash to meet repayments on debt and pay tax Teagasc advise early discussion with accountant & solicitor

4 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

5 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?

6 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

7 Repaying Debt Sole Trader Company Pay 40% tax + 4% PRSI + 8% USC before capital repayment To repay 20,000 principal requires 41,666 profit Pay 12.5% tax before capital repayment To repay 20,000 principal requires 22,857 profit

8 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

9 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

10 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

11 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

12 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

13 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

14 Annual salary Getting money out 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

15 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

16 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

17 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

18 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 22 nd October 2014