Is Incorporation right for me and my business, or not?
This article first appeared in Farm North East.
We’ve seen profit levels spike for some in the agricultural sector recently, with trading settling back to more “normal” levels for most. This could have seen healthy profits coming into the charge to tax.
The typical tax planning toolkit would include such measures as further qualifying plant and machinery investment - machinery lead times have impacted planning here for some, on farm repairs, fencing and draining, two-year and five-year Farmers Averaging, and larger pension contributions if higher rate tax was forecast.
Profitable periods have brought forward the conversation around succession and planning. If the next generation are already involved or are to become involved, could they take an interest in the business by becoming a partner or converting to a partnership structure from a sole trade business.
Slightly more radical in terms of business structure, may be to consider becoming a company with individuals becoming shareholders and possibly directors. Companies are subject to Corporation Tax (CT) and the main rate sits at 25%. The marginal rate of CT could be as high as 26.5%, if your profits chargeable to CT are in the £50,001 - £250,000 bracket.
We may therefore consider that a company is the preferred route to take, since we are comparing a main CT rate of 25% against the higher and additional Income Tax rates for a Scottish taxpayer of 42% (on assessable income over £43,662) and 47% (on assessable income over £125,140). Over and above this, we have class 2 (£179.40 per annum where assessable profits over £12,570) and class 4 National Insurance to consider (9% on assessable profits between £12,570 and £50,270 and then 2% on profits over £50,270).
You should be mindful that the profits and cash generated by a company are the company’s and to get the funds into the hands of the individuals in the company, this would need to be drawn typically via salary or dividends. These methods of extraction are subject to Income Tax.
If we move to a company structure, you should consider the following (not an exhaustive list):
| Point | Consideration | What to watch for |
| Assets | Machinery
Land and buildings, and additional taxes | Have appropriate tax elections been put in place? Contact will need to be made with finance providers to make sure agreements are novated. Are there any assets worth more than when they were bought – could be Capital Gains Tax (CGT) implications?
What land and buildings, if any, are to be introduced to the company? Consider CGT and any LBTT consequences. Farmhouse – if it is introduced to the company, consider any benefit in kind and ATED tax and reporting requirements. If land is to sit outside the company, will this impact the availability of Inheritance Tax reliefs such as APR and BPR? |
| Benefits in kind | Use of company assets i.e. vehicles | A tax charge can be assessable for use of the vehicle and any fuel for private use. |
| Legal | Appropriate paperwork | Shareholder agreements and appropriate incorporation paperwork. |
| Bank | Are they comfortable with any change? | Don't do anything without consulting Do any existing bank securities require to be reconstituted? |
| Department of Agriculture | Ensuring continuation of subsidy receipts to ensure no loss of income or slip in timing | Need to discuss with the Department of Agriculture/your agent. |
| Drawings/cash requirements (out with dividends and salary) | Tax consequence of taking money out of the company for personal use | There can be significant tax liabilities if this is not repaid within an appropriate period of time. |
| What if high profits are not sustained? | Are we stuck with the company structure? | Potentially higher compliance costs and regulation. More inflexible business structure. |
| Utilisation of tax losses | Inability to offset in-year tax losses against other personal income | In the unincorporated structure loss relief could be available. |
| Farmers Averaging | Not available when you incorporate | You lose this useful tax planning tool going forward. |
| VAT | New registration required/can we transfer the VAT number? | New registration required VAT number can be transferred subject to certain conditions being met |
| Cessation entries for old business | Tax year of cessation and effect on taxes and reliefs | Consider availability of Capital Allowances in the final period of trading. |
| Stock | Herd Basis for livestock | New election to be submitted to HMRC on incorporation. Stock entries and values on cessation of the old business and commencement of new business to be considered |
Incorporation is not the best route for all and there is a lot to consider before going down this route. This is why it’s so important that you speak to an expert.
Get in touch
If you would like to discuss anything further, please don’t hesitate to get in touch with myself, or a member of our Rural team.
