Farm business structure and Young Farmers Payment

Omagh based accountant Seamus McCaffrey
Omagh based accountant Seamus McCaffrey

DARD has recently issued the eligibility criteria which must be met in order to qualify for the Young Farmers Payment.

One of the criteria is that the young person must be Head of Holding.

If the young person trades as a sole trader the position is straight forward.

However, if the young person trades in partnership or as a limited company, evidence of being in control of decision making and risk taking is required to be maintained. The share of profit allocated to the young person in the annual Tax Return is a certified part of the evidence to be made available to DARD and will determine the young person’s tax liability.

Farmers have many options as to how they structure their farm business in order to meet tax planning, banking, day to day management and succession planning objectives.

The sole trader option means that the annual taxable profit up to £32,010 is assessable to tax at 20% plus 9% Class IV NIC. Assessable profits above £32,010 are liable at 40% plus 2% Class IV NIC. In order that the sole trader obtains the best terms from the bank, the annual balance sheet should be reviewed to ensure that it reflects the true net worth of the business. If the farm business has diversified into another activity, for example, renewable energy, careful thought is required as to how to reflect the trading assets and asset value of the diversified business. In many cases it may be desirable to incorporate the results of the diversified business into the annual accounts of the farming business in order to obtain Agricultural or Business Property Relief for inheritance tax purposes.

The partnership option provides an opportunity to apportion profits in different ways depending upon the role and commitment of each partner in the partnership. There is no restriction on the number of partners in a partnership and a limited company may be a partner and is called a corporate partner. With effect from 6 April 2014, Revenue & Customs has introduced anti-avoidance rules regarding profits allocation to partners in order to prevent artificial allocation of profits to evade tax. The share of taxable profits allocated to each partner up to £32,010 is assessable to tax at 20% plus 9% Class IV NIC; assessable profits in excess of £32,010 are assessed to tax at 40% plus 2% Class IV NIC. The share of profit allocated to the corporate partner is assessed to tax at 20%.

In many cases the farmlands and buildings are owned by an individual partner and may therefore not be included in the partnership Balance Sheet. This may result in the true net worth of the farm business not being effectively presented to the bank and therefore adversely affecting the ‘pricing’ of the overdraft/loan facilities. In this regard, it is necessary to take advice from the accountant and solicitor as to how to effectively deal with this issue.

It is strongly recommended that a partnership agreement is drawn up to include such matters as what assets are owned by the partnership and by the individual partners; what are the financial arrangements when a partner wishes to leave the partnership or on the death of a partner. It is very desirable that advice is obtained from an independent financial advisor in relation to insurance matters in order to provide capital to the continuing partners to pay the departing partner or his family his share of the partnership.

The limited company option is attractive for a growing business to retain profits for capital expansion in that the limited company pays corporation tax at 20% on profit retained in the company. With the prospect that companies trading in Northern Ireland will enjoy a lower rate of corporation tax from April 2017. There are many ways for the directors and shareholders to withdraw money from the company: salary; rents; dividends; reimbursement of expenses and repayment of directors loan.

There is no ‘one size fits all’, each farm business must do its own tax and financial planning in relation to a limited company, taking into account the level of taxable profits year on year; the living expense requirements of each director/shareholder and the level of borrowings. As mentioned in relation to partnerships, as the farmland and buildings may be owned by the individual(s) the balance sheet of the company may not reflect the true net worth of the business and, again, it is desirable to take legal and accounting advice.

The tax and legal frameworks allow for many variations in farm business structure. The challenge is to select a structure, in consultation with the farm bankers, solicitor, accountant and financial advisor, which enables the farm business to retain as much profits after tax as possible; encourages new skills into the farm; avails of new funding opportunities; is transparent to the bank and is tax compliant.