What are the benefits of incorporation for your agriculture business?

Research & Development : Rickard Luckin

As the agricultural sector continues to evolve and grow, it’s vital for farmers and other agricultural business owners to consider all aspects of their business structure.

Research and Development tax reliefs

One area of interest is Research and Development (R&D) tax reliefs. However, as claims can only be made by companies, this means that agricultural businesses operating as partnerships are unlikely to be eligible.

R&D tax reliefs offer one of the most valuable tax benefits available. To qualify, a company must be working towards a technological or scientific advance that requires overcoming uncertainties by a competent professional. If a company qualifies, it can claim an additional tax deduction which reduces corporation tax if the company is profitable. Loss-making companies can also surrender their loss in exchange for a cash payment from HMRC. In general, claimants can receive an additional 16-22% benefit for each £1 spent on qualifying activity.

While R&D can take place in any industry, the underlying activity is what is important for the relief. For R&D-intensive partnerships, incorporation may be worth considering, although this decision must be weighed against other factors, especially the increase in corporation tax from April 2023.

The R&D scheme is undergoing significant changes, with the enhanced deduction reducing in generosity, for expenditure incurred after 1 April 2023. HMRC is also increasing its focus on compliance activities, as there is believed to be over £400m of fraud and error within existing R&D claims. Therefore, new and more stringent requirements for information submitted with claims, will be required for claims submitted from 1 August 2023.

When making R&D claims, it is crucial to consider whether the claims still qualify. The largest costs for agricultural businesses, such as staff time, must be eligible for the relief. This often means paying staff through payroll, as opposed to extracting profits through dividends. With the increase in corporation tax and the decrease in the R&D deduction, it may be worth considering paying a salary if it supports a significant R&D claim.

Other reasons to consider incorporating

Aside from R&D, there may be other reasons to consider incorporating. One of the main benefits of a corporate structure is the ability to decide how much taxable income to extract from the company. If the business is making a large profit, paying a 25% corporation tax rate may be more advantageous than paying a 40-45% rate on undrawn profits in an unincorporated structure.

Incorporating may also resolve issues for sole traders with both farming and rental activities. For example, pooling the businesses into a limited company may simplify the process of sheltering rental properties from Inheritance Tax. While there are both tax and commercial downsides to consider, some businesses may still be appropriate for conversion to an incorporated structure, particularly with the support of specialist advice.

Incorporating may also offer tax benefits, but it is important to weigh these against any downsides and seek specialist advice to determine the best course of action.