In addressing the Deputy's specific question on the tax treatment of self-employed individuals carrying on a trade (including the trade of farming), as compared to companies carrying on a trade, it should be noted that self-employed individuals or those are taxed on their profits in much the same way as companies are.
An individual engaged in a trade is taxed on the net income of the trade, whether the person is a company or an individual sole trader. In computing net income, expenses which are wholly and exclusively incurred for the purposes of the trade are deductible for tax purposes. Capital expenditure incurred on the acquisition of certain assets for use in the trade (e.g. plant and machinery) qualify for capital allowances.
In relation to farming, there are a number of tax reliefs available to farmers, whether operating as sole traders or companies. These include allowances for capital expenditure on the construction of farm buildings and stock relief (an income tax relief given in respect of increases in the value of farm trading stock).
In relation to tax rates, a self-employed individual carrying on a trade is chargeable to income tax at his/her marginal rate on the net income arising to him/her from that trade. If a self-employed individual chooses to transfer his/her farm business to a company, the company will be chargeable to corporation tax at 12.5% on the net income arising from the trade. When the company remunerates individual employees (including the former sole trader) for work carried out, it will be required to deduct income tax from those payments at the marginal rate of each employee through the PAYE/PRSI collection system.
When the company makes any dividend payments or transfers any other assets to its shareholders, it will be required to withhold Dividend Withholding Tax from the payments. Individual shareholders, including the formerly self-employed individual, will be chargeable to income tax at their marginal rate on the value of the assets transferred.
Revenue have advised me that there are 4,400 Corporation Tax registered cases under the agricultural heading on their database. Based on the Revenue database and other sources, they further advise me that there are over 146,000 Income Tax registered agricultural cases.
The decision as to whether to incorporate a business is a matter for the individual taxpayer; the potential taxation implications feature amongst a number of other considerations, including the following:
- Limited liability- In limited liability companies, the liability of shareholders is limited to the amount of share capital they contribute to the company.
- A company is a separate legal entity from those who own it- a company may hold its own property and be liable for its own debts.
- A company may have more flexible borrowing powers than a sole trader.
- There may be a greater degree of business credibility of trading through a company.
- A company can raise finance by the issue of shares.
