Tax planning more important than ever - farmers warned

Irish Farm Accounts Co-operative Society Limited (IFAC), Ireland’s farming, food and agribusiness specialist professional services firm has reminded Donegal farmers that, at times when input costs are rising, budgeting, cost control and cash flow management are more important than ever.

According to IFAC, profits on most Irish farms improved in 2021 but supply pressures and inflation drove input costs up.

Declan McEvoy, Head of Tax at IFAC said: "Rising fuel and energy costs will erode profitability on many farms while in sectors like tillage, higher winter planting costs will potentially wipe out any price gains that farmers achieve.

“While farm incomes rose this year, higher input costs and supply issues mean tax planning will be more important than ever in the last quarter of 2021.

"Farmers are sometimes confused about the difference between cash flow and profit. Cashflow is the money that flows in and out of your business over a period of time whereas profit is the money available to service your living expenses, bank repayments, pension costs, tax bill and reinvest in your business after all of your business expenses are paid.

"The higher your profit, the higher your tax bill will be which is why proper tax planning is so important. Banks generally turn down loan applications for funding to cover tax bills however they will lend for working capital if you have a sound business case underpinning your funding application. When applying for funding, you generally require up-to-date farm accounts, with good historical performance figures, a clear business plan and a documented path for succession.

"At this time of year, as the income tax deadline approaches, the immediate priority from a tax planning point of view is to ensure that you pay the correct preliminary tax. Usually, this is calculated as 100% of your previous year’s tax. However. with profits up in 2021, calculating your liability based on the tax you paid last year could result in an underpayment of preliminary tax. Any shortfall would then have to be paid in October/November 2022 and could be subject to Revenue interest of around 8%. So, if you have surplus cash on hand at the moment, it is worth considering paying additional preliminary tax to reduce your 2022 tax bill.

"If you are a single person, you can earn €16,500 before income tax. If your income is at this level, your USC and PRSI liability works out at approximately €922.

"If you are married, you can earn €24,750 before income tax. If your income is at this level, your USC and PRSI liability works out at approximately €1,435.

"Immediate opportunities to reduce your tax liability can often be found both inside and outside the farm gate.

"Inside the farm gate, you can reduce your tax bill by €285 for every €1,000 of relevant business expenditure if you are on the lower rate of income tax, or €520 if you are a higher rate (52%) taxpayer."

Outside the farm gate, opportunities to reduce profit may be identified by:

Checking if you have availed of all relevant tax credits (eligible medical expenses are often overlooked).
Checking personal add-backs.
Ensuring that repairs are not included in capital expenditure.
Availing of stock relief where relevant.
Checking that family wages are being claimed. (Where relevant, there is still time before the end of the year to register family members on your payroll.)
Availing of income averaging.
Checking if any items of capital expenditure qualify for 100% accelerated allowances.
Making a pension contribution.

Depending on circumstances, there may be many other opportunities to reduce your profit in order to minimise tax.

Questions to consider include:

If your spouse works off-farm but earns less €26,300, could you top up their income to enable them to avail of the maximum income tax allowances?
Would bringing your spouse into the business and paying them a salary reduce your tax bill?
If your child leaves the farm to work full time elsewhere, could you pay them a termination payment?
Are there any necessary repairs you could carry out on the farm to reduce your tax bill?
Could you invest in renewables or replace items that qualify for 100% capital allowances in the year such as lighting, variable speed drive pumps or solar panels?
If your year-end is 31 December, could you push this out to bring in the extra winter costs of January /February?
Could you purchase stock and avail of stock relief?
Could you avail of income averaging?
Are there any capital projects, machinery, or buildings that you can invest in before year-end? (Keep in mind that only one-seventh or one-eighth of this cost can be written off this year)
Could you pay your employees a bonus? A bonus of up to €500 can be paid tax-free to each employee under the small benefit scheme.
Could you contribute to a pension for your employees?
Could you provide your employees with additional benefits?
Could you hive off part of your business into a company—for example setting up a contracting business and moving machinery into the new company?
Could you get your family to carry out contract rearing for you and hive this out to a family partnership?
Could you avail of the Employment Investment Incentive Scheme (EIIS)?

According to IFACE, most of the tax-saving opportunities listed above apply to companies as well as to sole traders and partnerships. In addition, companies should consider the following opportunities:

Paying the small benefit amount of €500 to the directors and employees.
Ensuring children are paid wages where relevant.
Claiming eligible travel and subsistence expenses.
Paying into a company pension scheme.
Matching employee’s pension contributions.
Providing benefits for directors while allowing the company to pay the cost and claim the relevant tax deduction.
 

When reviewing their  tax position, it is a good idea for farmers to take a hard look at your business.

IFAC SAID: "Matters to discuss with your accountant include the level of capital investment that your business will require in the short, medium-term and longer-term — what this is likely to cost and what funding options are available? If a substantial investment is needed, this could reduce your tax bill for a number of years.

"It is also worth exploring the pros and cons of changing your business structure — for example, would the business benefit from forming a partnership or setting up a limited company?

"Succession also needs to be planned for, particularly if you are aged over 50. In addition, every business owner should make a Will and update it from time to time as circumstances change.

 "With ongoing supply issues and input costs set to continue to rise throughout Q4 and into the New Year, it is important to have a good understanding of how cash flows in and out of your business. Take the opportunity to raise this with your accountant when you meet to discuss your tax return and seek advice on opportunities to optimise how your business operates while minimising your tax liability."