ADVERTORIAL
Ensuring the best structure for your business
There are four basic structures through which a farm might trade and this article will explain some of the advantages and disadvantages of each from a commercial and from a taxation point of view.
Sole trader
Many farms will start up using this method of trading. All income and expenditure is recorded and taxed in the year that it is earned, regardless of the drawings taken from the business by the farmer. The tax rate is anywhere between 20% and 45% depending on earnings with a further uplift for NIC Class 4 beginning at 9%.
This structure has a number of advantages – its simplicity,
its cheapness to administer and the freedom to claim certain personal expenses for tax purposes that would be restricted in other structures.
The main disadvantages are that the farmer has completely unlimited liability and the taxation bill may become large in ratio to the drawings, particularly when profits are retained in the farm for investment.
Partnership
A partnership has many of the flexibilities of a sole trader and the added advantage that profits can be divided amongst two or more individuals. We would normally advise this structure when a sole trader farmer finds himself regularly being taxed at more than 40% so that his profits can be subdivided to reduce the tax bill.
Limited Liability Partnership
A Limited Liability Partnership (LLP) is a partnership that, as the name suggests, permits the liability of the partners to be limited. This is clearly an advantage if the farm partnership perceives that there are risks in the business that the partners would like to control. This protection comes at a cost because the accounts are typically more expensive to prepare than a basic partnership and also parts of the accounts have to be displayed publicly at Companies House.
Limited company
If a farmer wants to either limit their liability or is concerned at high taxation levels, we would often advise that some or all of the business is transferred into a limited company. The advantage is that company profits are taxed at
19%, certainly lower than 40% or 45%, if a sole trader or a partnership. But to extract the profits, further tax has to be paid. Normally dividends are the most effective route. For a basic rate tax payer, dividends over £2,000 are taxed at 7.5%, and for higher rate tax payers at 32.5% or 38.1% for a top rate tax payer. Farmers’ averaging is not available to limited companies, so profits cannot be smoothed over a five year period and as in the case of an LLP, the annual accounts have to be sent to Companies House. In addition, certain personal expenses that can be claimed if trading as an unincorporated business cannot be claimed in a limited company and assets such as cars may need to be kept out of the limited company.
In setting up a limited company, particularly for farmers using the herd basis, it is possible to achieve a tax-free uplift on the value of the herd. The farmer can then draw down on this from the limited company without paying tax. The scope of this article is only intended as an introduction to what is a very complicated topic. If you would like some further advice, please do not hesitate to contact me.
Tim Maris | Partner | 01763 247321 |
t.maris@
uhy-uk.com www.uhy-uk.com | Cambridge, Letchworth and Royston
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