Many farm businesses trade as a limited company, writes Seamus McCaffrey (pictured).
There are advantages and disadvantages to a limited company structure.
Some of the advantages include the lower rate of corporation tax, which possibly may fall to 17 per cent by 2020; flexibility around pension planning; easier access to Tax Credits and Student Finance.
A limited company structure may facilitate succession planning and improve perceived credibility.
Disadvantages exist around extracting profits from the company and the fact that the company’s annual accounts may be accessed at Companies House.
There are many ways of extracting profits from a company: directors’ salaries; dividends; rent for a company operating from lands and buildings owned by the family; travelling expenses for using the private car for company business; repayments of director’s loan to the value of assets transferred to the company by the family and interest to the farmer on the value of the director’s loan.
From April 2016, the rules governing the taxation of dividends were changed with the abolition of the 10 per cent dividend tax credit and the introduction of a 7.5 per cent rate of tax on dividends.
The Finance Act 2016 also introduced a £5,000 dividend allowance, but this is to be reduced to £2,000.
The options available for the farming family to extract profits from a company are more flexible than for a sole trader.
At its simplest, the question of profit extraction from a company involves a comparison between taking a salary or taking a dividend or a combination of both.
As a general rule, the most advantageous strategy is to take a salary around the NIC threshold and the remainder as a dividend, ensuring that the combination of the two does not bring the person into higher rate tax.
While the tax effectiveness of dividends was reduced from April 2016, this strategy remains the same.
In addition, a careful review of company structure, involving spouses and children, subject to commercial and legal consideration, to utilise their personal allowance and lower rates of tax may result in a considerable tax saving.
For farmers who trade as a limited company and any person who receives dividend income, the changes to dividend taxation last year are likely to result in additional tax.
Profit extraction is an important consideration, requiring careful thought and consultation with the accountant to ensure that the most effective tax strategy is put in place.