Limited companies yield big tax savings

SINCE the barriers to dairy farmers incorporating their businesses were removed in 2008, there has been a steady stream of company formations resulting in the total number of farming companies now in their thousands.

The primary motivation for all those who incorporated was probably, without exception, the prospect of significant tax savings.

The question I will attempt to answer in this article is whether their expectations of generous tax savings have been realised.

I will answer that question in summary by saying that of the 70 or so limited companies that my firm is dealing with, not one of them has paid more tax that they would have paid had they remained as sole traders. In fact, the tax savings in many cases have been quite staggering, particularly in 2014-2015 while milk prices were strong.

On reviewing many such files, I was scratching my head wondering how the tax could have been met if the farmer in question had remained a sole trader.

The problem with farm profit is that it is generally not there at the end of the year in the form of cash at bank, but rather it has been reinvested in buildings, livestock or plant and machinery, or has been applied to reducing debt.

This situation prompts the most commonly asked question, ‘where is it?’, when I’m sitting in front of a farmer reviewing his annual accounts and telling him he has earned a profit of what appears to him to be an outlandish figure.

I can report that my job of informing my clients of their tax liability is infinitely easier where he or she is trading as a limited company. I will detail a number of cases to give an indication of the tax savings made.

PRACTICES TO BE AVOIDED

Incorporation can have a lot to offer in terms of tax savings and also in terms of a suitable structure to accommodate the farmer and his successor(s).

However trading as a limited company involves two layers of compliance, namely compliance with good corporate govern- ance which is overseen by the Companies Registration Office (CRO) and also tax compliance.

Good corporate governance means that the all dealings between the farmer and his company have to be at arm’s length and have to pass the test of commercial reality.

Your dealings with your company can be no different to dealing with a total stranger. In recent years, farming company issues are probably one of the more frequent topics that my firm is consulted on and unfortunately, the level of corporate and tax compliance leaves a lot to be desired in some instances.

I will detail the most common practices that give cause for concern.

FARM BUILDINGS

Buildings built by the company on land it has no freehold or leasehold title to is a common occurrence. Such situations can have legal and taxation consequences in the event of the company being wound up.

In all cases where buildings are likely to be erected, a longterm lease to the company of the farmyard and any adjacent land that might be built upon in the future should be drawn up.

HERD NUMBER AND BASIC PAYMENT

It is important when forming a company that the ‘to do list’ includes transferring the herd number and Basic Payment entitlements to the company.

In some instances, this has not occurred for a variety of reasons and Revenue could take issue. That said, legal opinion would suggest that if the company is clearly carrying on the farming activity, it is the beneficial owner of the BPS payment. Nevertheless, it is strongly advised that the herd number and BPS entitlements are transferred

GOODWILL

Some accounting practitioners appear to hold the view that a farm business contains a marketable goodwill element.

This may be the case with certain specialist producers who have carved out a niche market for their particular product and if their farm business was being sold as a going concern, it may attract some added value for this reason. Such added value can be classified as goodwill.

However, a normal commercial farm is unlikely to carry any goodwill as nobody will pay any more for it than the collective asset market value.

Accordingly, any suggestion to sell notional goodwill to the company to create or augment a director’s loan account where no realistic case can be made for the existence of goodwill in the first place should be questioned and a second opinion sought.

Martin O’Sullivan is the author of the ACA He is a partner in O’Sullivan Malone and Company, accountants and registered auditors. www.som.ie. Ph: 051 640397