With increased rates of Corporation Tax now in play and the incoming basis period reform, farmers may be faced with the dilemma of what is the most appropriate and tax-efficient way to structure their business.
Whether you decide to operate as a partnership or company will be determined by many factors but it is worth considering recent tax changes and the upcoming basis period reform to help inform any decision you make. That being said, Inheritance Tax, Capital Gains Tax, and family plans for the future should also be taken into account.
Increased Corporation Tax rates
Corporation Tax rates changed in April 2023. The rate of tax now depends on the level of profit and whether you own any other companies. For a farming family with no other associated companies, the first £50,000 of profit is taxed at 19%, the next £200,000 of profit is taxed at a marginal rate of 26.5% and any balance over £250,000 is taxed at 25%.
This means that a company making £100,000 profit will pay £3,750 more Corporation Tax than they did prior to the rate increase. However, this is still less than the 40% Income Tax paid by a higher-rate taxpayer if the business was operated as a partnership.
Dividend Tax increases
The key point when operating a partnership is how much is required to be withdrawn to cover living expenses or service personal loans and mortgages. It has previously been more tax-efficient to withdraw money by way of a dividend, but the tax rate payable on dividends increased by 1.25% in April 2022, meaning the position is now not clear-cut and it is more expensive to extract money this way.
Meanwhile, partnerships could face higher tax bills in 2025 as a result of changes being introduced by HMRC, known as basis period reform. This means all unincorporated businesses will be taxed on the actual profits in a tax year, rather than the profits from a set of accounts ending in the tax year.
If you do not already have an accounting date between 31 March and 5 April you will see your profits calculated differently and you may be taxed on more than 12 months profit in the transitional year to 5 April 2024. This may result in significant tax balances in the transitional period.
From 1 April 2024 (the 2024/2025 tax year) all unincorporated businesses will then be taxed under the ‘tax year basis’. Farmers operating via a limited company can continue to prepare accounts to their chosen year-end.
Capital allowances to consider
While a partnership can claim up to £1 million capital allowances via an Annual Investment Allowance (AIA) claim – and there few farming businesses who spend more than this in the same accounting period – from 2026, companies will be able to claim 100% tax relief on an unlimited amount of expenditure for plant and machinery. It is also worth bearing in mind this only applies to the purchase of new plant and machinery, whereas AIA can be claimed on the purchase of second-hand equipment.
Partnership or company?
This does not mean incorporation or indeed continuing as a partnership is no longer the right option for farmers. Where a farmer is expanding their business and does not need to withdraw all their profit by way of a dividend, the payment of Corporation Tax at 25% or 26.5% is preferable to Income Tax and National Insurance of 42%. However, trading as a partnership does offer much more flexibility to move funds and assets around in many circumstances.
As always it is essential to base a decision on your personal circumstances as there is certainly no one answer that applies to all farming businesses.
To explore whether a partnership or company is the most suitable way to operate your farm business please contact our agricultural team.
