The number of farmers opting to trade through a company continues to accelerate. In 2013, the number of farmers incorporating companies increased by 27% compared to 2012. This is primarily due to increased personal taxes and the introduction of the Universal Social Charge.
How to Incorporate
The most common method of incorporation is where the individual transfers or sells certain business assets to the new company. Typically the assets transferred are stock and plant & machinery. A farmer may want to retain ownership of the land and buildings as it is a more graduated approach.
However it may be advantageous to transfer some land particularly where the farmer is over 55 years of age and can qualify for retirement relief.
Capital Gains Tax and Income Tax should be carefully considered before a decision is made to incorporate a farm, to ensure that tax reliefs are conserved for the future.
Stamp Duty will also apply but rates have been reduced in recent years.
Advantages of Incorporation
Farming profits reinvested in the company are subject to 12.5% tax, compared to a top rate of up to 52% as an individual;
Companies have the benefit of limited liability;
Easier to split the business amongst multiple shareholders or successors;
Greater separation of personal assets from business assets;
Wages paid from company to spouses can benefit from PRSI cover, adding towards their entitlement to a state pension;
A sole trader pays income tax on profits earned no matter how the profits are used. Whereas a Director of a limited company only pays tax on actual income withdrawn by them from the Company.
Much more generous tax treatment of company pension plans compared with self-employed pension plans.
The transfer of farming assets as discussed above may create a Directors loan account which enables a farmer to withdraw that amount from the company tax free at any stage in the future.
Disadvantages of Incorporation
Company is a separate legal entity;
Director is treated as an employee and pays PAYE/PRSI/USC as an employee;
Higher set up costs; and
When succession planning obtaining good advice is essential as the tax reliefs are more complex for a company but will not be lost with careful management.
If you would like to discuss any of the above further or have any questions in relation to accounts, tax, corporate finance etc. please do not hesitate to contact us