Business Clinic: Turning your farm business into limited company

Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s experts can help.

Farmers Weekly Business Clinic expert Pat Tomlinson, agricultural specialist at chartered accountant Albert Goodman, explains the pros and cons of turning your farming business into a limited company. 

Q We are dairy farmers and last year my accountant told us we should trade as a limited company to reduce tax. Is that still good advice given the milk price has fallen so much?

A There are two main benefits in trading as a limited company – reducing tax and limiting personal liability.

Company profits are subject to corporation tax at 20% (reducing to 19% in 2017 and 18% in 2020). But as a sole trader or a partnership, profits are subject to income tax and national insurance (NI) which, after personal allowances, are 29% for basic rate and 42% for higher-rate taxpayers.

Pat Tomlinson
Agricultural specialist, Albert Goodman

This means if the business has a bank loan, a partnership needs £1.41 of pre-tax profit (or £1.72 if paying higher-rate income tax) to repay £1 of debt, whereas a company needs only £1.25.

The headline differences look attractive, but it is worth doing a calculation for your business to see if it is beneficial – it will depend on how much profit you expect to make, how many partners are (or could be) in the business and what level of private drawing is needed.

Private drawings are usually taken from a company in the form of a salary up to the maximum allowable before incurring income tax and NI (£8,060 a person this tax year) with the remainder taken as dividends (returns on shareholders’ investment).

This tax year, dividends are effectively taxed at 0% for basic-rate taxpayers (and carry no NI liability) and so each owner of a company can take up to £42,385 (depending on their other sources of income) without paying any income tax or NI.

From April 2016, dividends above £5,000 will be taxed at 7.5% for basic-rate taxpayers, but that is still much lower than 29% income tax and NI.

The tax advantages are more extreme if you are a higher-rate taxpayer.

The second main advantage of the limited company structure is that it provides protection to the owners.

Their only personal liability is to the nominal value of their shares (typically less than £1,000), whereas a sole trader or partner in a partnership is personally liable for all debts of their business up to the full value of their personal assets.

However, there are downsides to consider about incorporation.

Owning land in a company can be disadvantageous, especially if it incurs a substantial gain in value (for example for development) and the owners want to use the proceeds for other purposes.

If a business stops trading, there can be tax charges on extracting the money out of the company, although these can be mitigated with good tax planning.

All company accounts are available on public records at Companies House, which can deter some people.

Companies cannot use farmers averaging, although losses can be carried forward indefinitely to set against future profits for tax purposes.

In summary, incorporation is a popular tool for reducing the tax bill and the difference between corporation tax rates and personal income tax rates continues to widen – but it is not a panacea for all.

There can be considerable benefits and it is well worth investing the time in understanding all the effects on your business over a number of years – not just the very profitable or the very poor one.

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