FARMING VIA A LIMITED COMPANY

FARMING via a limited company has become more popular but is still not common. It suits those who are paying income tax at the top rate of 40 per cent plus PRSI of four per cent and USC of eight per cent or a total of 52 per cent and who also have substantial borrowings.

With personal ownership of the farm one only has 48 per cent left, after paying taxes, to fund capital repayments. However, with a company which pays tax at only 12.5 per cent on its profits, there is 87.5 per cent of the profits left to make the capital repayments.

Some farmers who bought land at very high prices during the boom were unable to service the loans as only the interest element of the repayments are tax deductible. They then transferred the loan and the original land to a limited company and once the company operations turned a profit they were able to repay the loans on both interest and capital.

These types of arrangements are rare but a structure where the farm operations are put into a company with the land being rented by the owner to the company is gaining popularity. They are usually done to save tax and not because of heavy borrowings.

In order to decide if a company would be tax effective the profits of the farm must exceed what the owner needs to live. Otherwise on becoming a company he would have to pay out all the profits as a salary to himself under PAYE so that the company would have no profit to avail of the 12.5 per cent tax rate.

In order to switch to a company, a farmer has to register the herd or flock number and the entitlements to subsidies in the name of the company. They must open a bank account in the company name and advise all suppliers and banks and HP companies of the new entity. Any outstanding loans can be switched to the new company. If new farm buildings are going to be erected by the company, it needs a formal lease of the site. If this is not done then the company has not title to the buildings and a claim for VAT refund and farm buildings allowance could be refused.

The farmer can get the company to pay him an annual rent and by concession the Revenue will allow the farmer to decide on the optimum level of rent to suit his tax situation each year. The cost of preparing annual accounts for a company will not be a lot more than the accounts for a large sole trader farm and audited accounts are not required.

There are, of course, some disadvantages with a company. The retained profits in it can only be got out by salary or dividends, both of which are taxable. Farm buildings allowances on personally owned buildings are no longer available in a rental situation.

Capital Gains Tax Retirement Relief continues to be available on the farmland but relief may not be available on sales to third parties. Shares in farming companies do not qualify for gift tax agricultural relief but may instead get business relief which is a similar relief. The VAT refunds for capital expenditure and the flat rate refund are both available to companies.