Business Clinic: Should our dairy business stay as partnership?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, Kate Bell, a partner with accountant Albert Goodman sets out considerations on partnership capital and income shares.

See also: Business Clinic: advice on fluctuating partnership capital

Q: We are partners, with my husband’s parents, in our 250-cow dairy, which after investment in a new parlour in 2020, has been profitable.

We seem to be paying a lot in tax, but our accountant says we are still better to remain as a partnership.

Can you help us understand why this may be when we hear of others paying 19% tax in a limited company.

A: If you draw all profits from the business for personal use, the partnership option may be best for your family and business, but each situation is individual.

Tax on sole trade/partnership profits is 0-45% (an effective rate higher than 60% is possible too) plus Class 4 national insurance (NI) of 0-6%.

Limited company profits are taxed at 19-25%, with 19% on only to the first £50,000.

With four partners in a partnership, taxable profits of up to £200,000 could be taxed at no more than 20% (basic rate) plus NI, assuming no other income and excluding pension contributions.

Averaging can help keep more income in the basic rate band when profits have fluctuated.

Other incomes such as pensions, rent, diversification income and off farm work will affect the position and may use some or all of your £12,570 income-tax free personal allowance and basic rate band, where tax is paid at 20% on income between £12,570 and £50,270.

Capital allowances on expenditure such as parlour costs, silage and slurry investments can reduce taxable profits for a partnership or a limited company, reducing the tax payable to the lower rates.

If cash allows, pension contributions can also be used to lower the rates of tax. However, if combined taxable profits consistently exceed £200,000, a limited company may be worth considering.

Different rules for company money

Corporation tax rates are attractive, but the company’s cash is not your own. It must be extracted via a remuneration strategy (salary, dividends, rent, interest) tailored to your situation.

Beware – you can pay tax twice, first on profits made in the company, and if you are withdrawing through dividends you are then paying tax again, without relief.

Dividends are taxed at between 8.75% and 33.75% after corporation tax has already been paid.

If you withdraw 100% of profits from the company, tax may be similar to a partnership. If you retain profits for reinvestment, debt repayment, or company pension contributions, then incorporation (transferring the trade into a company) can be beneficial.

Given recent changes to IHT, it is also important to consider what any change in structure will have on the family’s IHT position.

Before incorporating, consider:

• Milk and other contracts
• Banking requirements
• What may be transferred into the company – just trading assets or land and property
• Inheritance tax (IHT)
• Capital gains tax (CGT) and stamp duty land tax (SDLT)
• Succession plans
• Reporting requirements and taxation for personal expenses through the business
• Extent of cash extraction for personal living
• Personal income tax.

A key question is whether land and property should be transferred into the company.

Example: £2m debt is secured on an owned farm, structured so both debt and land are in the company. Interest is tax deductible and capital repaid after up to 25% tax.

The land could be gifted or sold to the company. Selling creates a director’s loan account (DLA), allowing tax-free withdrawals later.

Note, CGT and SDLT may apply and you may have to break fixed rate loans which could be costly.

Alternatively, keep the land and debt personally, transferring only trading assets (livestock, machinery, plant) to the company.

You’d still likely create a DLA but it may only cover a few years’ repayments. Note that a DLA is an investment for IHT purposes, fully chargeable at 40%.

The company could pay you rent for land/buildings as a method of withdrawing money from the company.

This is a deductible expense for the company (saving 19-25% tax) but taxable to you at 0–45% after allowable interest deductions.

Finally, you should engage with the bank early.

Do you have a question for the panel? Outline your legal, tax, finance, insurance or farm management question in no more than 350 words and Farmers Weekly will put it to a member of the panel. Please give as much information as possible. Email your question to FW-Businessclinic@markallengroup.com using the subject line “Business Clinic”.