Farmers and rural businesses should consider incorporating to make the most of reduced tax rates, according to accountant Old Mill.
Chancellor George Osborne announced plans this week to cut Corporation Tax rates to 15% - down from the current level of 20%. Compared to the 20% rate of Income Tax for sole traders and partnerships, this looks remarkably attractive. “Although farm incomes are under intense pressure at the moment, there are signs that commodity prices are starting to improve – aided in part by the weaker Pound - and everyone is working in the hope that agriculture will return to profitability in the future,” says chairman Mike Butler. “Whatever the level of profitability, retaining as much of your hard-earned income as possible by minimising tax bills is a sensible option and perhaps the key to survival.”
Although the headline cut in tax sends the clear message that Britain is open for business, it’s actually not as dramatic a reduction as it appears, since the Chancellor had already announced it would drop to 17% from April 2020. But it does further widen the gap between tax paid by companies and individuals.
“We don’t yet know when the drop to 15% will happen, but it would be sensible for farmers to weigh up the options of incorporation sooner rather than later,” says Mr Butler. “There are a number of areas that need to be considered carefully. Inheritance Tax and Capital Gains Tax must be borne in mind; you need to be careful to retain valuable tax reliefs that may benefit succession planning at a later stage.”
For example, shareholders living in a farmhouse and wanting to secure Agricultural Property Relief (APR) from Inheritance Tax must be in control of the company, he explains. “In the case of two brothers each holding a 50% shareholding in the farming company, both would lose APR on their houses as neither are in control.”
From a Capital Gains Tax perspective, an issue can arise when the company rents the land from the landowner, who may or may not be a shareholder. “Typically the land remains outside the company, so often it pays a rent which reduces taxable profits and services the landowner’s debts,” says Mr Butler. “The problem can arise if the landowner decides to sell the land – having taken a rent would preclude them from using Entrepreneur’s Relief and thereby benefitting from the reduced 10% rate of Capital Gains Tax.”
Other considerations when incorporating a business include making sure Wills are redrafted, drawing up a shareholders’ agreement to clarify matters in the event of a dispute, and managing the accounts. “Typically a farming company will not have to be audited, so the paperwork is, on the whole, no more onerous than a sole trader or partnership,” says Mr Butler. “People are often wary of publishing their figures at Companies House, but with so-called ‘small’ companies all you have to file is your balance sheet, so your profit and loss account is never made public.”
Shareholders and directors will have to pay Income Tax on any salary drawn from the company, but can also extract profits in tax-efficient ways like pension contributions and dividends to minimise personal tax bills, he adds. Farmers need to be aware of the additional Income Tax charge levied on dividends from 6 April 2016 but this tends to affect those drawing large sums from their companies. “Profits retained in the business are not subject to further tax, which makes a limited company particularly suitable for businesses looking to reinvest.”
· For more information contact Mike Butler on 01749 335019.