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Hazlewoods Agriculture team update - Business structure

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4 September 2012
Many farming businesses are not incorporated and operate either as a sole trader or partnership.  This may have been the structure when the business was originally set up. However, this may no longer be the most tax efficient structure.
Tax considerations

The owners of an unincorporated business suffer income tax on the profits made by the business as the profits are made, irrespective of whether the income is extracted from the business. The owners of an incorporated business, operated through a limited company, will only suffer income tax when income is extracted from the company. Profits made by the company will suffer corporation tax at a rate of 20%, until profits exceed £300,000 per annum, when the marginal corporation tax rate is 25%.

As the owners of unincorporated business will suffer income tax at a rate of at least 40% when profits exceed £42,475 per annum, there may be tax advantages to operating a farming business through a limited company, when not all of the profits made are extracted from the business.

Additionally, where a business has borrowed funds to finance a new project, undertaking this project through a company may also be more tax efficient. As the loan repayments are made from profits taxed at a rate of 20%, instead of 40%, 50% or even 60%, leaving more profits to repay the borrowings. The company could be separate from an existing partnership, or could be introduced as a new partner. Introducing a corporate partner into an existing partnership can also be tax efficient with regards to income tax.
Single Farm Payments

Where changes are planned to the structure of a farming business, the effect on the entitlement to Single Farm Payments should be considered, to ensure that the planned changes do not have an adverse effect on the entitlement.

Going forward

A farming business structure should be reviewed on a regular basis, to ensure that the structure is tax efficient and takes account of changes in legislation and the individuals involved in the business.  A structure that was tax efficient 10 years ago may no longer be tax efficient.

If you would like to discuss tax planning issues please contact Nick Dee or Peter Griffiths on
01242 680000.