The only thing worse than paying tax is paying more tax than you need to. With the year just beginning, now is a good time to take a look at where savings can be made and how a little bit of planning can help avoid any nasty surprises in the future.

This article is not going to try to show you any “interesting tricks” to avoid paying more tax, or tell you to set your equine farm up as a corporation and sell it your pitchforks for €70,000. We’ll leave those kinds of adventurous policies to your private discussions with your accountant.

Instead, we’ll focus on the perfectly simple, fully compliant and easy to understand tax rules that you might not be fully taking advantage of.

Please note: Where an individual’s ownership and racing of racehorses is considered a “hobby” or a “recreational activity”, it will fall outside the scope of income tax

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Dual income benefit

Joint assessment is the tax treatment that best suits most couples (whether married or in a civil partnership), even if one of them is self-employed. Joint assessment allows tax credits to be shared, and generally means more money can be earned at the lower 20% tax rate.

Speak to a tax professional to find out what is best for your circumstances, as, in some cases, separate assessment may be more desirable.

Paying a wage to spouse

If your spouse is not earning an off-farm income, it may be worthwhile looking into paying them a wage to extend to 20% tax band availability. Farming spouses are usually heavily involved in the running of the farm and can justify the wage.

Tax credits

Once you have that taken care of, the next thing you need to do is make sure you are taking advantage of all the tax credits you are entitled to. See Table 1.

Business/personal bills

If you spend money on things that are used for both personal and business use, then you can claim a deduction for part of the expense. For bills like a mobile phone, internet and car running costs a portion of the expenses, based on use, can be claimed.

Contracting

If you are doing contract work on other farms where the total turnover is greater than €37,500 you are obliged to register for VAT. Careful tax planning will be needed to avoid bringing the whole farm operation into the VAT net.

Income averaging

This allows farmers to pay tax based on the average of five years’ farming profits and losses. Generally, you must remain in the scheme for a minimum of five years, but it is possible to step out for a single year. Note, this scheme is more about cashflow management than making outright tax savings over the longer term.

Capital allowances

Large-value items which will be used over several years have their cost written down over several years. It is this write-down that is a deductible expense. In the case of farm buildings and land improvements, they are written down over seven years, while plant and machinery (including tractors) are written down over eight years.

Energy-efficient equipment

Farmers are allowed write off the full cost of qualifying energy-efficient equipment in the current tax year. This is called an “accelerated capital allowance.” The SEAI maintains a list of qualifying equipment on its website. While the list includes a large number of fully electric vehicles, there are as yet no electric tractors. Cars can avail of the ACA, based on the lower of either the purchase price of the vehicle or €24,000.

Family wages

Where a member of the family is employed full-time on the farm, they are entitled to the employee tax credit. A child living at home can earn €13,000 before incurring any income tax or USC liability.

The child must make a commercial contribution to the farm, be a registered employee and an annual employer return must be made.

Small benefits scheme

You can give your employees (even if they are your child or spouse) up to €1,000 each in the form of vouchers each year. This €1,000 can be given in one or two payments and is tax- and PRSI-free.

Pensions

Despite numerous attempts, no farmer has been able to keep going forever. With this in mind, it does make sense to maximise pension contributions when earnings allow.

There are limits to the amount of tax relief that can be claimed, based on age. Pension payments treated as taxable income when they are drawn down after retirement.

VAT

Farmers who are not registered for VAT can get refunds on the VAT element of any invoices relating to capital expenditure. This means VAT on spending on fencing, farm buildings, land improvement and fixed equipment can be claimed back. Farmers are entitled to claim VAT back on items purchased in the past four years.

Capital gains tax

This tax is payable at 33%, so it is key to take advantage of exemptions, particularly in large transactions like transferring a farm. Obviously, in such cases, you will need to speak to a tax professional, but here are the general exemptions that matter for farmers:

Retirement relief – if you are between 55 and 65, and dispose of the farm to close family, then you can claim full relief. If you are over 65, then there is a €3m cap in place.

If you sell to someone outside the family the relief is capped at €750,000, if you are between 55 and 65, and capped at €500,000 for over 65s.

There is no capital gains tax payable if you transfer a site of less than one acre and €500,000 value to a child, so long as the child builds a house for their main residence.

Capital acquisitions tax

The flipside of capital gains tax is capital acquisitions tax (CAT), paid by the receiver of the asset if it is a gift. There is no CAT on gifts between spouses or recognised civil partners. In all other cases, there is an annual €3,000 CAT-free gift limit in place. In the case of a farm transfer there are two reliefs applicable.

Agricultural relief: in cases where they qualify, this relief allows the value of the property for taxation purposes to be reduced by 90%. CAT is then paid on the balance.

The recipient must pass an “active farmer” test to qualify for this relief. If the recipient does not qualify for agricultural relief, then they may qualify for business relief. Talk to your tax adviser for details.

Group thresholds: parent to child transfers generally have a €335,000 lifetime allowance. Other direct relatives qualify for a €32,500 lifetime allowance, while non-blood relatives have €16,250 allowance.

Stamp duty

Speaking of property transfers, it is important to keep on top of stamp duty reliefs. Normally, stamp duty on transfers of property is 7.5%. This can be reduced to 1% under consanguinity relief – where farmland is transferred to a relation, and where that relation engages in active farming for a period of six years. This relief is set to expire at the end of 2023.

If the person receiving the farm qualifies for “young trained farmer relief” then they can get a complete exemption from stamp duty. There are several conditions governing this relief, including that the receiver is under 35 years of age and has a recognised qualification.

Leasing and forestry

If you are stepping back from farming, but do not want to sell the land, then leasing is an attractive option. Tax-free lease incomes depend on the length of the lease, ranging from €18,000 for a five-year lease to €40,000 for a lease of more than 15 years. Income from forestry is exempt from income tax. This includes forestry grants, annual premiums, sale of thinnings and clearfell, all of which attract no income tax liability. However, they are still subject to universal social charge and PRSI.

VAT payment

Unregistered farmers should ensure they are being paid the flat-rate VAT refund on all sales. From 1 January 2023, this rate dropped to 5% from the previous 5.5%