Changing Agri Business Models



  • Dairy farmers are at their most profitable for decades, leading many to reflect on their business models
  • Switching to limited company status will mean retained profits are only taxed at 12.5%, compared with a top rate of 55% for sole traders
  • But the process can be long and complicated, entailing a new legal entity status, a more complex tax structure, and obligations to Revenue

Irish farmers are increasingly looking at switching from sole trader to limited company status. The trend is being driven by rising milk prices and high tax bills, but where to start and would it suit every business?

Twelve months ago, Irish farming couple Lorna Sixsmith and Brian James changed their business status from sole trader to limited company.

“We decided to change for financial reasons,” says Sixsmith. “We had large loans and our repayment of capital was viewed as drawings which meant we were paying a high rate of tax on money that was actually going to the bank. In short, we couldn’t afford to continue going as we were.”

According to Philip O’Connor of agricultural specialist IFAC Accountants, such a switch in business structure is an increasing occurrence especially among Irish dairy farmers, with the ending of the milk quota rules in 2015 one of the key drivers. “Dairy farmers – in comparison with other sectors – are at their most profitable for 30 years,” O’Connor says. “By changing your status to a limited company, you can control these profits better and reduce the tax bill.”

Indeed, company retained profits, minus the amount taken by a director as remuneration, are taxed at 12.5%, compared with a sole trader whose earnings are taxed at a top rate of 55%.

“The tax savings could allow you to buy more land, extra cows or a new building,” says James McDonnell, farm management specialist at the Agriculture and Food Development Authority, Teagasc. “It also reduces the risk from volatile milk prices as you can build up a cash pile in the company.”

Controlling profits and debt repayments

A company can also give farmers a better repayment capacity for debt, says O’Connor. This is because, as a result of the tax savings, farmers have to earn less income to repay their loans.

Stock and machinery generally transfer to the company as an asset through a director’s loan account, and goodwill may also be transferred if, for example, the farmer is well known for breeding animals.

Land and buildings are normally leased to the company with the farmer receiving a rental income. However, land can be brought into the company for a tax charge.

O’Connor cautions farmers that switching status should be seen as part of long-term rather than short-term tax planning. They should not be swayed by a single stellar profit-making year.

“Look at your last three years of accounts and work out an average profit,” he says. “Farmers also need to be aware of when their capital allowances are ceasing for any capital works they have done over the years. You might be paying a small tax bill at the moment as a result, but how will that look in a few years’ time? They need to consider their underlying tax bill and how long it will shelter their profit for.”

Suitability: is this status right for you?

Farmers near to retirement must also think carefully about the impact of switching on succession planning.

“When we meet a farmer, we discuss a suite of areas with them to decide whether a company is the right move or not,” O’Connor says. “For example, take a farm with a €100,000 profit. If it’s farmed by a 70-year-old then we would look at his age and ask do you really need to become a company so close to retirement?”

Switching is not for everyone. For example, those farmers drawing all their sole-trader profits as remuneration will not benefit as they will continue to be taxed at a high rate. “You could be a young farmer with kids who are privately educated. If you have outgoing costs as high as these then you need to consider whether a move will be advantageous to you,” says McDonnell.

There are also potential complications if looking to pass on your farm to the next generation. A company is a far more complex tax structure to pass on – as it is a separate legal entity – than a sole trader.


“Dairy farmers are at their most profitable for 30 years. By changing your status to a limited company, you can control these profits better and reduce the tax bill”
 Philip O’Connor, IFAC Accountants

“It all depends on your personal scenario. The first thing you need to ask yourself is where do you want to be in 10 years’ time? Why do you want to make a change and is there an alternative such as perhaps hiring an extra bit more labour on your farm?” McDonnell says. “There are extra costs to pay in setting up, there is more administration, refinancing negotiations with your bank about your existing loans and rising accountants’ fees. You also need to have separate bank accounts and declare public accounts.”

Farmers need not just think about their obligations to Revenue such as registering their company details and keeping up with those annual accounts. They must also be aware of their Department of Agriculture regulations including moving their herd number and Basic Payment Scheme into the company.

Understanding change

O’Connor says that even after start-up the complexities of being a limited company can be confusing. “You need to understand that the company money is not your money. It’s not somewhere where you take cash out for the groceries or for a house extension. That’s because money drawn down from the company, including a salary, will be taxed at the higher rate.”

However, O’Connor expects more dairy farmers to follow the company route as the sector becomes even more profitable. “Dairy farmers are the ones mainly making this move,” he says. “If you are consistently making good profits and have a strong long-term plan for your farm you can make a company work. From the clients we have helped we have seen very few problems after switching.”

Pros and cons

“The clear benefit of our move has been the lower rate of tax payable,” says Lorna Sixsmith. “However, the cons have been the costs involved in transferring as we had to sell land to the company so it could have ownership of an asset and be able to take over the farm loans. It wasn’t just the legal costs; it was also the stamp duty and capital gains that had to be paid.”

Sixsmith says the three-month long process was “stressful”, exacerbated by the fact it happened during the busiest time of the year: the calving season.

“I’d suggest anyone thinking of doing it to use an agricultural solicitor; at the very least, ask farmers who have done it before for a recommendation,” she says. “In short, a good and experienced solicitor, a good accountant and the ability to get on well with your bank manager are crucial. We’re only a little over a year in and we’re glad we made the move, but I wouldn’t like to have to go through the process again. Lots of chocolate to hand is a good idea too!”

Looking ahead

Another farmer who has made the move is Denis O’Connor, who farms 220 cows in South Tipperary. “I’m in my early 40s, I have a long-term vision for our farm and wanted to quickly build up cash and expand,” he says.

O’Connor says the switch took between two and three years of preparation and planning. “You have to give it a fair bit of thought and look at past profit performance. I spoke to a lot of farmers who had already gone through the process.”

He says he has seen no downsides from the switch. “It does tie up your land as you can’t just turn around tomorrow morning and sell a parcel of it. We put 10% to 15% of our land into the company to ringfence it and the rest is now leased. I am looking at buying up new land as we continue to expand.”

Phil O’Connor, Denis’s brother, urges all dairy farmers to examine their tax costs. “It’s so significant that you need to look at the structure to find out if you can make savings,” he says. “The answer may be a company or a partnership, or to do nothing. But if you don’t look at it then you will never know whether your tax structure is as efficient as it should be.”



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