What is the right entity for your farming business?

This article provides a brief overview of the key benefits and pitfalls of different business structures.

Often the simplest route, this structure means all profits from the farm are taxed under self-assessment and are subject to income tax and national insurance. There are relatively few admin costs and a number of reliefs. These include farmers’ averaging, where good and bad farming years can be smoothed to make better use of the personal allowances and variations in tax bands, and offsetting of losses against other income sources, provided hobby farming rules are met.

As the owner and business are one and the same, the main risk is that the liabilities of the business fall on the individual, meaning personal assets are exposed. In a loose analogy, you are literally ‘betting the farm’ and maybe your home.

Other drawbacks include;

• the taxation of all profits each year, regardless of how much is withdrawn personally
• consideration of basis period reform, where reporting will be increasingly difficult if the accounts are not run to a 31 March/5 April year end
• MTD is on the horizon, whereby real time reporting to HMRC will be required
• upon death of the owner all business accounts will freeze and personal representatives will not be able to access them until probate is granted
• lending can be an issue once the farmer reaches 75 years of age

A partnership structure can be useful where one or more individuals, be they family members or otherwise, are working together with a view to profit. The partnership agreement allows the sharing of profits and losses between the partners at agreed upon percentages, allowing the contributions to mirror the reward. Partnerships offer flexibility with a limited administrative burden and can be easily set up or amended.

As with the sole trade route, a big risk is the personal liability each of the partners take on by being partners of the business and caution must be taken as liabilities are shared by the individual partners. Again, all profit is taxable regardless of how much is extracted and succession planning can be more complex. SDLT must be considered for some transactions and can be especially impactful where partners are not connected parties.

The ownership of underlying partnership assets and land need to be considered, especially in light of HMRC’s view around what counts as a trust for TRS reporting purposes.

The issues around basis period reform and MTD are also relevant for partnerships.

Often seen where liabilities are higher, a limited liability company does exactly that, as a separate legal entity, a limited company provides a limit on the personal liability of the business owners where, subject to specific exemptions, creditors can only come calling for the value of the company, not those assets held personally.

As expected, companies are subject to corporation tax rates, which are currently lower than income tax rates, however further income tax will be incurred on extracting value to the individual by way of dividend or employment income. Tax efficient options include pension contributions to employees, which usually attract corporation tax relief for the company but do not directly lead to a tax charge on the employee.

With full expensing of capital purchases currently in place, companies are very attractive structures for farms looking to make large capital investments which might qualify for plant and machinery capital allowances.

Succession and sharing of wealth amongst a family can be simplified by way of share transfers or with the creation of additional classes of share, allowing specific individuals to retain overall control where required.

As a company, the reporting requirements and administrative costs are naturally higher with the requirement to produce statutory accounts which must be submitted to Companies House; this also means some company information is made publicly available. SDLT may also be incurred when transferring farmland or property to a limited company and should properties valued in excess of £500,000 be introduced to the company, there will be annual tax on enveloped dwellings (ATED) reporting requirements to consider.

With an aim to combine the flexibility of a partnership with the reduced risk of a limited company, limited liability partnerships (LLPs) are becoming increasingly popular.

An LLP is again a separate legal entity to its owners, meaning a member is only liable up to their capital contributed however, like a partnership, they are transparent for tax purposes and the members are taxed annually on their share of profits or losses. They share similar reporting requirements to companies.

Numerous options are available when considering which structure is best for your farming business, however the most appropriate entity will depend on individual business and personal requirements in terms of exposure to risk, levels of taxation, the need for control and the levels of administration and publicly available information you are comfortable with.

If you would like to discuss any of the above, please do get in touch with your usual contacts or one of the contacts listed.

Approval code: NTEH70524100