Putting in place the right company structure for farm businesses

Historically, setting up a limited company that becomes an additional partner in the business has been an option used by some farming businesses.

Iain McVicar, managing partner at accountant Albert Goodman, says it was a strategy that was quite popular 15 years ago, as it was tax efficient for more complex businesses generating good profits.

“You used to be able to put a company in as a partner and pay it whatever profit you liked. The company would pay corporation tax on the profit (at 19% or 25%), rather than the individual partners paying higher rates of tax.”

See also: Implications of restructuring a farming business 

Another advantage of having a company within a partnership is that the farmhouse could still qualify for inheritance tax reliefs, whereas if the business switches to a predominantly limited company structure, these reliefs can be lost.

Although a fair number of legacy businesses are still set up this way, it has become much less common, says Iain.

This follows a change in the rules that took effect from 6 April 2014. To ensure profits are distributed fairly and realistically, there are now restrictions on the amount of profit that can be allocated to the corporate partner.

Profits must be linked to the amount of capital the company has deposited into the wider business, plus what the company owner might be paid for their labour and management time.

“This has reduced its attractiveness for many,” Iain notes.

That said, in recent years, he says he has had clients choose to introduce an existing cash-rich company into a partnership as a way of shifting capital into the farming business without having to liquidate the company.

Key considerations

In addition to the limits on profits, there are other potential issues to watch out for before making such a move, Iain warns.

A key consideration concerns the level of investment that a business might be planning to make in plant and machinery.

The Agricultural Investment Allowance (AIA) allows sole traders, companies and partnerships to deduct 100% of qualifying capital expenditure from profits in the year of purchase.

However, if a partnership includes a company (or “non-natural” person) then that partnership is not eligible for AIA and is limited to writing down allowances (WDAs) at 18%.

Another area to watch is the extra administrative costs associated with running a company, such as preparing company accounts, filing a company tax return and paying fees to Companies House.

Overall, these costs might amount to £3,000-£5,000/year.

Introducing a corporate partner is also only possible when someone genuinely new is joining the partnership.

“Given the current limitations, each partner probably needs to be making about £60,000 in profit before I would even consider it,” says Iain.

“In cases where we used to put a corporate partner in place, what we will quite often do now is change the trading elements of the business into a limited company instead.

“Alternatively, setting up a separate limited company alongside the partnership can be an option.”

Limited liability

Iain says a separate limited company can be a good option for farmers who are setting up an enterprise that is creating risk, as it is a mechanism to protect the wider business.

“For example, I have a client with holiday lets that have their own water supply, which are being run as a company to give that extra protection. I would also suggest this option to anyone processing food, as things can go wrong and insurers could refuse to pay out.”

Legal experts agree that using limited company structures alongside traditional partnerships has become common for dairy farmers and vegetable or fruit growing businesses, with the land and property assets remaining outside the company structure.

Vivienne Williams, head of the agriculture team at law firm Michelmores, says this approach is worthwhile in terms of the limited liability offered by the company structure, but it can generate challenges for succession and tax planning.

“The partners in the partnership may not be the same as the shareholders and directors in the company.

“While the family might view their wealth as spread across the company and the partnership in the same proportions, this may not be the case in practice.

“As a consequence, what might seem a straightforward way of dividing up assets equally between family members may have difficult tax implications to work through.”