Case Study Summary – Updated July 2019

Case Study; Not an actual Client but based on advising on Tax matters for over thirty years – Updated July 2019

Moving an existing dairy farming business into a limited company farming structure

This is a brief summary of the options.This paper should not be relied upon without taking specific advice from John Holohan & Co.

Report for Milk Farming Partnership “Father & Son”    

 

INDEX

Page Numbers

2          Introduction

3          Brief business history

4          List of Taxes to be considered

5-8       Questions to be addressed and Commentary

8-10     Impact on various Taxes when a farming business is moved into a limited liability structure due to the fact that that the Partners are no longer Farmers but Directors/Shareholders and Landlords.

10        Current Dairy Farm Partnership

11        Estimated Professional Fees re-examining /setting up/transferring to the limited liability company structure other options for farming

12-14   Actions to be taken by Client i.e. FATHER & SON

15        Filing obligations and Corporation Tax payment dates if a limited company is used for the business  

16        Income Tax/PRSI & USC versus Corporation Tax and PAYE/PRSI/USC

17-18   Executive Summary and Recommendations

19        Appendix I                 Proforma Closing Partnership Balance Sheet and Opening Balance Sheet for the Limited Company

20        Appendix II               Use of a Limited Company for your Business; Advantages and Disadvantages

21-22   Appendix III              Rental Tax Trap

 

Introduction

You must have a positive net worth under company law to transfer the existing business into the company & any positive net worth is treated as a loan by the owners of the business to the new company .Also if the opening list of liabilities is greater than the assets this is a loan to you by the company and you will be exposed to the possibility of 20% withholding tax due by the company and a taxable personal Benefit in kind on yourself.

You need to choose the assets and liabilities that you will move into the company

S.600 relief is available if you transfer all the assets and liabilities into the company in relation to CGT.

Stamp duty is payable on transfer of assets like property & goodwill at a rate of 6% of the market value based on a stampable instrument.

Assets that attract Capital Gains Tax include Goodwill and Property so careful consideration is necessary.

You need up to date accounts and then you must go through each item on the Balance sheet to assess the treatment of each item -will it be moved into the limited company? Any tax issues? Any company law issues? Any practical issues?

WARNING! We are tax experts not farm experts. The client will need to get advice on farming matters such as grants, entitlements, herd numbers, Farming Partnerships  etc.  and a written report from Teagasc or an Agricultural consultant. We will then work together with your Agricultural consultant. 

Remember if you move the entire farming business into the limited company it is the limited company that is now the farmer not you. You are now not farmers but directors/shareholders and landlords!

 

Brief business history

Currently FATHER   and SON are trading in a Milk Production Partnership.

FATHER is farming for forty years. SON   is farming in the Milk Production Partnership with FATHER for 10 years plus .The legal transfer of 50% of the farm including farm assets was completed to avail of the Gift Tax reliefs and Stamp Duty reliefs in relation to the transfer from FATHER and he  availed of the Capital Gains Tax relief in relation to the transfer to SON.

 

List of Taxes to be considered

Corporation Tax 

Income Tax

PAYE /PRSI/USC  

VAT

Stamp Duty

Gift tax

Inheritance Tax

Capital Gains Tax

 

 

Questions to be addressed and Commentary

VAT on transfer/disposal to limited company

While the Capital Goods Scheme does not apply to farm buildings etc. the basic VAT on property rules apply to all sales or transfers of (farm) land and buildings i.e. developed as defined, new/nearly new, Transfer of Business “no Vat in/no VAT out” etc. etc. so a full VAT on Property review needs to be done in each case.

In this case study it is assumed the Father & Son partnership is not VAT registered ( VAT 58 claims have been made).

 

Should the partnership or limited company register for VAT? Depends on the figures and future intentions re purchase of machinery and buildings.

 

The partnership received VAT (4.8% & if applicable 5.4%) on top of its sales for 2018 of €30,000.We estimate the VAT on inputs for 2018 (obviously not claimed because you are not registered for VAT) was €18,000 so you had a net gain of €12,000 less €6,600 (top rate of Income Tax/USC/PRSI 55%) =€5,400 “after tax net gain” because you were not VAT registered.

Stamp Duty clawback -was “Young Farmer” relief utilised within the last 5 years? This is not a problem because the transfer to SON was more than 5 years ago. In any event if SON was the major shareholder the 5 years could flow over into the limited company use.

Gift tax clawback -was 90% Agricultural Relief utilised within the last 6/10 years? This is not a problem because the transfer to SON was more than 6/10 years ago.

Crystallisation of Income Tax liability-If no other farming carried out in individual’s name then permanently ceased farming & Income Tax review needs to be carried out. This will be done in due course. Final accounts for the partnership will have to be prepared from the 1st January 2019 to the date of commencement of the farming in the limited company with a review of the tax liability for 2018.

 

Questions to be addressed and Commentary (continued)

Also we need to check was Income averaging used? This is not a problem here because it has not been used.

Capital Gains Tax liability -any chargeable assets such as land, buildings and creation of Goodwill will be exposed to a potential Capital Gains Tax liability. See commentary below on Goodwill and Appendix I.

Salary better than rent from a cashflow point of view but watch Stamp Duty tax trap (licence may avoid this but watch VAT and licences can often times actually be leases under EU VAT law & Court Cases -Revenue’s attitude was historically to accept a legal licence as such but the guidance now is that each renting of property has to be looked at to see is it a licence or a lease.

Director’s loan? See Appendix I -this loan can be drawn tax free from the company because you have already been taxed on it.

Beware if you transfer any equipment and machinery ( on which you have claimed capital allowances) at a value over the original cost you are exposed to CGT. There is an election which can be made to transfer the equipment and machinery at the tax written down value so there will be no Income Tax/USC/PRSI to be paid on the transfer of the business into the limited company.

Farm buildings being rented constitutes a tax disposal? No.

Stock ; There is an election which can be made to transfer the stock at the  tax written down value so there will be no Income Tax/USC/PRSI to be paid on the transfer of the business into the limited company but there must be a permanent discontinuance of farming by both partners.

 

Farm Buildings -lease or lease by way of licence to company or transfer – lease otherwise 6% Stamp duty & re Capital Allowances -no balancing charge or balancing allowance if the farm buildings are transferred to the company or leased or lease by way of licence to the company.

Cash at bank how much do you want to move into the company

Overdrafts   need to renegotiate in limited company’s name; bank permission needed

Questions to be addressed and Commentary (continued)
Bank loans
bank permission needed to change into limited company name unless relate to farm buildings & land being retained in individuals’ names and being rented or leased under licence to the limited company. Be careful that you can pay the loan repayments and tax bill out of the rent if you leave the land & buildings in the partners’ names. There is a tax trap here to watch out for. See appendix III.

Goodwill – this needs to be carefully considered -Goodwill can be defined as the excess of monies received over and above market value of the assets less liabilities being sold or transferred-this is a chargeable business asset liable to Capital Gains Tax (CGT) ; will creation of this this trigger a CGT liability? Or can Retirement relief apply ?Does the bona fide test brought in under the 2017 Finance Act apply to the relief? Need to be careful in a partnership -maybe one partner qualifies and the other does not -if so at least it will create (all other things being equal) a loan to the directors. Is it subject to 6% Stamp Duty? Stamp Duty payable on a written instrument -is there one? How will you value this Goodwill. Revenue have clamped down on excessive valuations (see Medical Consultants incorporating with excessive Goodwill). Goodwill in farming; farms sell for value of land & buildings & equipment but there is no evidence of farms selling at above the market value of the assets and definitely no evidence of “super profits” In my opinion there is no Goodwill to be set up in the new limited company.

Farm Entitlements-If sold without land and sales proceeds in excess of €37,500 then VAT is payable at 23% and the proceeds are subject to Capital Gains Tax. If transferred into the limited company as part of transfer of the farm business then VAT “transfer of business relief” should apply but the transfer would be subject to Capital Gains Tax. FATHER could not claim S.598 unless the appropriate amount of land was transferred simultaneously into the limited company. Are these transferrable to a company or keep them as part of rent re land rented/licenced to the limited company?

Does DAFM have any issue with the types of payments made?

Capital Allowances Currently Available 

Equipment & Machinery; €100,000 (approximately 5 year to claim)

Questions to be addressed and Commentary (continued)
If transferring trade of farming elect at tax written down value.

Farm Buildings; €20,000 (approximately 2 year to claim)

Retain in partnership?

HP loans bank permission needed? In practice no;as long as you keep paying the repayments.

Capital Accounts of sole trade/partner-Less share capital of say,50, the balance if ,in credit is a loan to the company which can be drawn on tax free by the director -beware this Capital Account figure  will be after any assets (& liabilities) such as land ,buildings and shares not transferred over into the limited company .It is essential to draw up an estimated opening Balance Sheet for the limited company.

New farm buildings or extensions to existing buildings -will these be in the company name or in directors own name -legal implications must be discussed with your solicitor-financial consideration is if you leave (or if you have to leave because of legal advice) the building outside the company structure how do you finance this ? Tax on renting your building to the company to fund a personal loan will lead to a tax trap especially when the farm buildings capital allowances & interest on the loan begin to run down ; beware of using company funds for an asset belonging to you !! This will result in a possibly very large tax bill!!  As mentioned elsewhere how will the company impact on grants. Remember you are no longer a farmer but a landlord and company director

 

Rent of the Land

Stamp duty trap if you rent at a peppercorn rent e.g. Say market value rent of buildings to the limited company is 40,000 per annum and you show only say 1,000 per annum on ,say, a ten year  lease. You are liable for Stamp Duty as follows;

10 (years) *40,000*6%= 24,000 (plus interest & penalties)

A licence may avoid this issue but VAT?? but will the Bank ,in the event of a loan to the limited company for say farm buildings ,have a problem lending on a licence?( Bank will insist on personal guarantees in any event )

 

Impact on various Taxes when a farming business is moved into a limited liability structure due to the fact that that the Partners are no longer Farmers but Directors/Shareholders and Landlords.

Impact on Gift & Inheritance tax of transferring farm business into the company

Agricultural relief – you will not get Gift/Inheritance Tax re shares in a farming company but you might get Relevant Business Property Relief where the entire farming business is transferred as a going concern.

Business relief available- Land being rented is an investment but if farm limited company shares & land pass together to same person at the same time then Relevant Business Property Relief could be available .A will is very important in relation to this. Unlike 90% Agricultural Inheritance relief where the receiver of the agricultural property must fulfill the 80% farmer test ,there is no such test in 90% Business relief for the receiver -family 75% control etc but check out FATHER side of this equation.

Cat planning -shares of different kinds-using Company Law & tax market value rules  to ring fence the growth in wealth in the company to go to the younger shareholders & to skip the older shareholder/s-Business Relief will apply to a smaller figure and possibly keep the child under their Inheritance/gift tax threshold & save inheritance tax/gift tax.

The possible growth in share value in the new limited farm company may affect Agricultural relief in the future.

Impact on Capital Gains Tax (CGT) reliefs S.598 & S.599

Ultimately disposing of the shares in the company; Farmers can continue to avail of this relief on the disposal of shares in the limited company provided they qualify under the relevant

Conditions and also can avail of the relief re land, machinery or plant in their own names as long as the land, machinery or plant was used throughout the period and is disposed of at the same time to the same person.

Disposal of land to unrelated parties may not be eligible for retirement relief.

Impact on various Taxes when a farming business is moved into a limited liability structure due to the fact that that the Partners are no longer Farmers but Directors/Shareholders and Landlords.

Entrepreneur Capital Gains Tax rate 10% ; this is also available to qualifying farmers

 

Impact on Income Tax /PRSI/USC

Farm partnership accounts to be prepared to date of cessation, with review of second last year.

Income averaging ;there is no issue with ceasing farming and a clawback of Income Tax/PRSI/USC because the partnership is not in the Income Averaging system .Okay from 2019 onwards for income averaging & non-farm trades & 25% plus shareholdings in companies.

Corporation Tax 12.5% rate on farm trading Income and 25%/40% on rental and investment income.

PAYE /PRSI/USC a 50% Shareholder Class S= 4% or Class A EE 4% Plus 10.95% Employer PRSI-If in doubt get a Scope ruling. Any spouse or children are treated as ordinary employees because the farming limited company is their employer, not the director/shareholders

Company Pensions -company versus sole trade – See Appendix II

 

Main Income Tax sections applying only to individual farmers

Income Averaging

Land Leasing

Enhanced Stock Relief

Succession Farm Partnership

Impact on various Taxes when a farming business is moved into a limited liability structure due to the fact that that the Partners are no longer Farmers but Directors/Shareholders and Landlords.

Should the Farm Ltd co register for VAT? -you need to run the numbers based on the last partnership accounts & also consider other items like are you going to be buying machinery, building  or changing the farm to another enterprise – Remember if you register for VAT you will lose the sales VAT of 4.8%/5.4% & the reclaim of VAT on the VAT 58 items (but in any event a company is entitled to) but the company can of course claim all of the VAT 58 items VAT in its normal VAT return if it becomes VAT registered.

Investment or Rental Income in the company -taxed at 25% plus 20% (15% effective rate) if the company does not dividend out within 18 months of year end ,provided the company has distributable reserves.

 

Current Dairy Farm Partnership

If permanent discontinuance of all farming trading then normal cessation rules apply and election can be made to transfer stock at tax written down value.

Your Agricultural advisor will advise you on the Department rules.

  

Estimated Professional Fees re-examining/setting up the company structure

Get quotes!

Chartered tax consultant reviewing the case & drawing up a report estimate €4,000-€5,000 plus vat

Legal Fees re advice re land & buildings & if necessary drawing up lease or licence and stamp duty on the lease/s

Teagasc /Agricultural Consultant

Company formation expenses, if the company structure is suitable, of €250 and Accountants fees formation of the company, Taxes registration of new company approx. €500-600 plus VAT.

 

Actions to be taken by Client if Moving 100% of the farming business into the limited company.

  1. Obtain advice from your solicitor re the treatment of existing land & buildings & also the erection of future buildings & the acquisition of future lands. Do you need a lease, for how long or would it be a licence that should be drawn up?
  2. Get your solicitor to confirm in writing the date of the transfer of the land etc from FATHER to SON .This is vital re the potential clawbacks re Gift Tax and Stamp Duty.
  3. To get a report from Teagasc /Agricultural Advisor.

Remember if you move the farming business into the limited company it is the limited company that is now the farmer not you .You are now not farmers but directors/shareholders and landlords!

We are not farming experts so we are relying on you to get all the information you need to make an informed decision from the above advisors in relation to farming matters. The following items occur to us

Clawback in any grants received by you e.g. There is a 5 year term clawback of the TAMS grant if you cease farming.

Transfer of Entitlements -Confirm with Agricultural adviser that you can keep these in your individual names as part of the rent/licencing of the land?

Are there grants which are available to individual farmers but not to a farming limited company?

Effect on Milking Farm Partnership

Are there are any major changes coming down the tracks that would depend on you both being farmers in your own names rather than the limited company being the farmer ?A classic example of a major change was the base year for milk quotas where some farmers lost out or not depending when they started farming.A more recent example would be the conditions for the “reference points” in the allocation of entitlements in the Basic Payments Scheme.

 

Obtaining a herd number for the limited liability company -any problem with this?

Can the partners keep their herd numbers?

 

  1. Obtain a report from an Auctioneer/Valuer of the market value rent for

Land & buildings being rented to the company

 

 

Actions to be taken by Client (continued)

This is required under company law. It is also required if you rent the land and buildings to the company re the Stamp Duty tax trap mentioned above. Your Solicitor can advise us if a licence will avoid this tax trap.

  1. VAT 58 reclaim-if any o/s get in to Revenue /get repaid before using the company commences (must use the items in a “farming business” for at least one year after date VAT was incurred but not an issue with VAT 58 section that it could be in use in the limited company use instead of used by you in your own names within that year-see note 8 to VAT 58 form)
  2. If the farming business is being transferred into the Limited Company then;

(a) Set up bank accounts in name of company (check re overdraft facilities & negotiate with bank to have them in the Company name).

(b) Get the name changed for milk suppliers account.

(c) Change name on all purchases suppliers. For instance you cannot make a VAT 58 claim or VAT 3 claim if the invoice is not addressed to the limited company.

(d) Get tax numbers for the company for Corporation Tax, PAYE/PRSI/USC and VAT if applicable (refer to JH). (The VAT registration can take up to 16 weeks)

(e) Instead of Drawings each month/week you are now in receipt of directors’ salaries so you will have to be registered as employees of the company and PAYE/PRSI/USC deducted from your gross salary and paid over monthly to Revenue (refer to JH).

(f) Set up a direct debit for the net amount (i.e. after tax deducted) to be paid to each directors’ bank account from the limited company bank account.

(g) Transfer Entitlements to the limited company (or keep as part of rent of land or licencing of land, if possible).

(h) You will need to review how you want to handle your own car or jeep. Do you transfer them into the company and pay PAYE/PRSI/USC on the benefit in kind on up to 30% of the original market value (beware you could buy the car for €5,000 but if its original market value when the first owner bought it was €50,000 then you are taxed on a maximum ,depending on mileage, on €50,000*30% =€15,000 by your top tax rate) or leave it outside the limited company and charge mileage to the company ( and subsistence if applicable).If you use an electric vehicle provided by a company there is no taxable benefit in kind and company gets 100% write off of a maximum amount of €24,000.

(i) Register for VAT in individual names, if necessary(refer to  JH).

(j) Joint Election (partners and limited company) for machinery to transfer machinery at tax written down value on transfer of the farm business into the limited company, if required. (Refer to JH) Tax books (licencing certificates) for tractors to be transferred.

(k) Joint Election (partners and limited company) for stock to transfer stock at tax written down value on transfer of the farm business into the limited company, if required. (Refer to JH)

 

(l) FAO FATHER; your Will must include that the your shares in the farm limited company and your land are left to SON  at the same time, in order for SON  to obtain 90% Relevant Business Property Relief on the agricultural relevant business property part of the limited company, if this relief is applicable. Note FATHER needs 50.01% of shares in this case.

(m) If applicable reassign leases of land to the limited company.

 

Filing obligations and Corporation Tax payment dates if a limited company is used for the business

Tax Office

The filing date for the limited company corporation tax return is eight months and twenty one days (twenty three max.) after the financial year end. Depending on the quantum of corporation payable most companies have to make a Preliminary Corporation Tax payment on the 21st of the second last month before the financial year end and then any balance due for that particular year must be paid on or before the above return filing date.

 

 

Companies Office

A limited company has an annual filing date called its “ARD” (Annual Return Date). This is normally nine months after its financial year end .One then has to file a form B1 and abridged financial statements and  “patch page” within 28 days plus 28 days (soon to be fifty six  days in total) of the ARD.

 

Income Tax/PRSI & USC versus Corporation Tax and PAYE/PRSI/USC

 

Income Tax/PRSI/USC for the partnership                                        €100,000

======

Corporation Tax                                              €23,265

Directors PAYE/PRSI/USC                           €16,700

______

Total Taxes for Company                                                                   €39,965

======

 

Difference                                                                                           €60,035

======

 

Note the disadvantage is that if you want to access the funds after Corporation Tax has been paid you will have to pay PAYE/PRSI/USC on whatever you extract. However the company structure gives you options that a sole trade does not.

 

Executive Summary and Recommendations

 

Having examined the transfer in detail the following is a summary of the options re the farming business structure.

 

  • Transfer total farm business into the limited company; clawback of TAMS Grants so does not suit. This could be done in the future at an appropriate time.

 

  • Transfer the machinery into a leasing limited company and lease back to the Dairy Farm Partnership-the disadvantage is that it leaves all the capital allowances tax relieved at 12.5% not maximum 55% but on the plus side the leasing payments are tax deductible in the FATHER & SON partnership. Note any losses in the leasing limited company are ring-fenced.

 

 

  • Split the farm enterprise ;cattle and tillage leave in partnership -form new partnership & transfer the dairy business into the limited company -licence shared use of land ,farm buildings and machinery to the limited company -Farm partnership still active farmers-Main problem here is the stock would have to transfer at market value because no permanent discontinuance of farming trade.

 

Nothing further occurs.

 

John Holohan

5 Upper Rowe St.,

Wexford.

 

info@johnholohanandco.ie

 

 

 Appendix I                 Proforma Closing Partnership Balance Sheet and Opening Balance Sheet for the Limited Company –Not necessary for Case Study

 

 

 

Appendix II               Use of a Limited Company for your Business; Advantages and Disadvantages –See separate tab on website

 

Appendix III              Rental Tax Trap

Cashflow

Year 1

Rent received                                                              10,000

Bank Repayments                                                       (10,000)

Income Tax /PRSI/USC                                             (1,000)

______

Surplus/(Deficit)                                                           (1,000)

======

Tax Computation

Year 1

Rent                                                                                                                10,000

Allowable Interest on Bank Repayments                                                         8,000

______

Taxable profit                                                                                                    2,000

=====

Income Tax/PRSI/USC                                                                                    1,000

======

 

Interest element of the bank repayments falling with time

Cashflow

Year 5

Rent received                                                              10,000

Bank Repayments                                                       (10,000)

Income Tax /PRSI/USC                                             (3,000)

______

Surplus/(Deficit)                                                           (3,000)

======

 

 

 

 

Tax Computation

Year 5

Rent                                                                                                                10,000

Allowable Interest on Bank Repayments                                                         4,000

______

Taxable profit                                                                                                    6,000

=====

Income Tax/PRSI/USC                                                                                    3,000

======

All other things being equal this deficit will increase each year as the tax deductible interest decreases putting you under increasing pressure to fund the deficit.