Independent Farming
June 2011
Every farmer is familiar with the system of single farm payments (SFP) but what about the income tax implications of your SFP? With the recent surge in entitlement trading, it may also be useful for farmers to understand the other taxes that apply when an SFP is transferred or sold.
Income Tax
The SFP is liable to tax as income.
A farmer earns two main types of income:
- Sales from a farming trade, from which deductions are available for the farmer’s costs in calculating the amount subject to tax
- Single farm payments, from which no deductions are available for tax purposes
For example, if a farmer has sales of €30k, single farm payment of €20k and costs of €15k, his taxable income will be as follows:
Sales €30k – costs €15k = €15k
Single farm payment €20k (no deduction for costs)
Total taxable income €35k
Therefore, unlike sales, the single farm payment is taxable in full.
The payment by one farmer to another to acquire a single farm payment entitlement is not tax deductible for income tax purposes. However, where interest is incurred on a loan taken out wholly and exclusively for the purpose of acquiring a payment entitlement, this interest is tax deductible.
The income tax exemption in respect of the lease of certain farmland also provides exemption for single farm payments under certain circumstances.
Capital Gains Tax (CGT)
The sale or gift of a payment entitlement by one farmer to another is subject to capital gains tax. If sold by the farmer originally entitled to the payment, the entire proceeds will be subject to CGT at the current rate of 25 per cent, as the farmer will not have paid to acquire the entitlement. If an entitlement is acquired from the farmer who was originally entitled to the payment, and this is then sold to a third farmer, the gain subject to CGT will be the difference between the proceeds of the sale to the third farmer and the amount paid to acquire the entitlement from the first farmer.
This is illustrated in the diagrams below:
Farmer 1 Sells for €20k to Farmer 2 (Holds Original Entitlement)
Farmer 1 will be subject to CGT at 25 per cent on the gain of €20k. CGT of €5k is due. The €20k is a pure gain as Farmer 1 held the original entitlement and did not therefore pay to acquire it.
Farmer 1 Sells for €20k to Farmer 2 Sells for €30k to Farmer 3 (Holds Original Entitlement)
As above, farmer 1 will be subject to CGT of €5k on his gain of €20k. Farmer 2 acquired the entitlement for €20k and sold it for €30k. A gain of €10k was made and CGT of 25 per cent is due on this gain. CGT of €2,500 is due.
Retirement Relief
Gains on the disposal of farm land may be exempt from capital gains tax due to retirement relief, subject to the qualifying conditions being met. The sale of a payment entitlement may also qualify for exemption where the land sold is connected to the payment entitlement and the sale of the land qualifies for retirement relief.
Capital Acquisitions Tax (CAT)
Transfers of payment entitlement, whether by way of gift or inheritance, are liable to CAT at the current rate of 25%. The tax is payable by the beneficiary and is charged on the value of the gift/inheritance that exceeds the relevant tax free threshold. The tax free threshold depends on the relationship between the donor and the beneficiary. The current life-time threshold from parent to child is €332,084.
The transfer of a payment entitlement may qualify for agricultural relief or business relief, subject to the qualifying conditions being met, which reduces the taxable value of the gift or inheritance by 90 per cent.
Stamp Duty
There is a an exemption from stamp duty on the sale, transfer or other disposition of a payment entitlement.
VAT
A farmer who is not registered for VAT but who exceeds the threshold for registration (currently €37,500) by virtue of selling a single payment entitlement, will be obliged to register for VAT. Non-VAT registered farmers who purchase a single payment entitlement and suffer VAT will not be entitled to recover the VAT. Where a farm business, including payment entitlement, is sold as an ongoing business, the sale may qualify for VAT transfer of business relief, and will not be subject to VAT, provided the relevant conditions are met.
Conclusion
The single payment entitlement is treated like any normal asset in that normal tax rules apply to the receipt of income from, and acquisition and disposal of, the payment entitlement. It is worth reviewing the tax consequences of any transactions undertaken with your accountant or tax advisor to ensure that all income is returned, all reliefs are being availed of and all the necessary documentation is in place.
Aidan O'Boyle is a manager in Grant Thornton's Tax department
Email aidan.oboyle@ie.gt.com