Managing Finances Including Budgets/Cash Flow Legal Farm Structures & Tax By Declan Mc Evoy Head of Tax IFAC Accountants Irish Farm Centre Email: [email protected] Tel: 01 4551036 JMH 11/11

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Cash Flow Budgeting

CASH FLOW • Cash flow is the movement of “cash” in and out of the business over a given time period. • Only actual income / costs are accounted for on a cashflow as and when they occur. • Monthly Surplus Deficit – How does effect me “How does Cashflow Effect My Current Account”

Cashflow Budgeting – Key Points • • • • • •

Know why you want to do a Cashflow Put in EU payments first Work through expected sales & costs Use last years figures as a guide Estimate if figures are different Update regularly and compare with actual

“By Realistic with your Income and Costs”

FINANCIAL PLANNING • • • • • • • 10/23/2014

Making profits but having no money – Why? Paying tax and having no money – Why? Large increase in stock Paying down a loan or creditors High drawings Large debtors – money owed Correlation between these 5

Farm Profit – Where is it gone? Farm Profit is allocated to the follow: 1. Capital Loan Repayments (Interest is on P&L) 2. Tax Liabilities 3. Personal Drawings 4. Investment in new capital – Buildings, Machinery

“Profit is NOT Cash”

2015 The Perfect Storm?

Cash Flow Issues 2015 • Cash Reserves from positive milk price 2013 & 2014 used for expansion. – Extra Stock – Pay off loans – Capital investment

• Drop in Milk Price • Superlevy on 2014/15 quota year to be paid 2015 • Balance of Tax from 2014 due in 2015 – Profits 2014 up on 2013

Careful Planning & Budgeting = Money Retained by YOU!

Legal Farm Structures

FARMING STRUCTURE Sole Trader Partnership – MPP - Non MPP Limited Company – Since April 2008

RECENT ADDITIONS • • • •

Share Farming Share Milking Contract Rearing Cow Leasing

SOLE TRADER • Most Common/Less Legalistic • Easiest to Operate • Taxation – Income – level at where hit high rate • - Capital Tax – Normal Rules • Volatility measure (Budget 2015) income averaging • Available to all

PARTNERSHIPS Traditional Type:

• No Formal Agreement • Share of Profits • Governed by Partnership Act 1890

PARTNERSHIPS Milk Production Partnerships: • Administered by Milk Partnership Registration office • Access to quota • Very legalistic to set up but highly beneficial

PARTNERSHIPS New Reg Partnerships: • Dept. of Agriculture – Register • Benefits – Grants, BPS • Tax Benefits – New stock relief 50%

ISSUES ON PARTNERSHIPS • • • • • • •

Hugely Legalistic Assets are partnership assets Need for written agreement If in registered Farm Partnership – only one Can set up partnership not on register Partners can be individuals or persons Need for separate Partners Capital Accounts

TAX ISSUE – Partnership is a Tax Reporting Entity • Tax Benefit – new stock relief • Each partner taxed on their share

INCOME TAX • Income volatility/Averaging • Same tax position as sole trader • Stock relief @ 50%

• What other measures?

CAPITAL TAX • Update Will to include Partnership assets • Individuals same rules • How to deal with land purchased • Joint Tenancy – (benefit on same ceased at 31/12/13)

Partnership Asset Be Aware of Issues • • • •

A & B in Partnership Profits shared 50/50 40 acres land bought Reg in “A’s” name Not belong to A but Partnership

PARTNERSHIP SUMMARY • • • •

Need for proper agreement Proper partnership Capital Accounts Be aware of family wages issue (PRSI) Tax Beneficial - Capital Taxes - Income Tax • Effect of Budget 2015 • Need for Tax Measure to encourage • Available to all

Limited Company – only available to Dairying since 2008 • Step up again in complexity • Familiarity helps • Dealing with Company law and Taxes (Income, CT and Capital) • Benefits should outweight disadvantages

WHO DOES IT SUIT? • Developed farmer with high tax • Developing Farmers with high investment/borrowing require • Farmers with high borrowings • Farmers looking to create wealth • Not suited to all due to complexity

REMEMBER: • • • • • • •

Company is a separate legal entity Company own the assets Only retained profit pay at 12.5% Winding up is complex No income averaging Can now qualify as a qualifying lessee Entitled to flat rate farmer status for VAT

Collabrative Farming – additions to Traditional Structures Share Farming: • Each farmers brings own farm to agreement • Each farmer agree to share income • Each agrees to share costs • Formal agreement put in place • No template for Dairying

SHARE FARMING TAXATION • Each farmer treated as individual farmers • Not a partnership • Each makes own returns • Regarded as two Sole Traders

• Same Income Tax and Capital Taxes

CONTRACT REARING • Farming • Same Tax rules as Sole Trader • Need for Agreement

SHARE MILKING • Operates Farm on behalf of owner • Normally for a share of income and expense • Advantages for both • Taxation – taxed on income • Need for Agreement

COW LEASING •

Separate Trade

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Not farming

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If it exceeds €37,500 - VAT

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Impact on main farm flat rate

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Plan to avoid problems

TAX SUMMARY Budget 2015 – opened up land to active farmers However problem is: • Income Tax • Single person up to €33,800 low rate > €33,800 high rate (tax payable at low rate) • Married person: up to €42,800 low rate (one earner > €67,600 high rate (two earners)

TAX SUMMARY VOLATIVITY Income averaging being moved to 5 years: • Effective • Smoothes rise over a longer period • Averaging cannot be looked at short term • Look over a 5/7 year period

• Capital allowances unchanged

TAX PLANNING • On farm • Off Farm • Legal Structure

Using Your Financial Accounts Effectively • Effective Tax Planning- Look forward not backwards – Annual Year End Review – Tax is a cost! – Tax Planning – exploring all the options • Profit Monitor – Accuracy is critical!

• Management Reports - financial accounts can be used for management purposes. • Valuable information • Compare to Projections

IFAC ACCOUNTANTS 100% OWNED AND CONTROLLED BY FARMERS FOR THE BENEFIT OF FARMERS 35