Contract / Share farming agreements – when did you last review yours?

Contract or share farming arrangements can be a very useful tool for both existing businesses and new entrants to the industry.

Though historically mainly aimed at the arable sector, it is now far more common to find many forms of agreements where farmers come together to form a joint venture covering both arable and livestock enterprises of all sizes, in a variety of structures.

For existing businesses, a correctly structured arrangement can offer the opportunity to expand the existing enterprise in a controlled manner, sharing both operational and financial risk and it can also give access to land that would otherwise be unavailable through a simple tenancy arrangement due to the landowner’s exposure to Inheritance Tax.

As a capital intensive sector, agriculture has always struggled to attract enough new entrants into the industry. Contract and share farming arrangements have given an excellent opportunity for ‘young’ farmers to start up in business and get a foot on the ladder. As well as sharing the financial risk with another, usually more established business, new entrants can also benefit from learning from the experience and knowledge of a partner business.

There are many issues to consider when thinking about entering into such an agreement, a major factor being the structure under which the operation is carried out and the tax implications thereof. There are many types of structure to consider, from a straightforward contracting agreement with the landowner being the farmer, taking on all the financial risk, to a fully incorporated entity where each of the parties own shares and share all the risks and rewards. With many combinations and variants of these in between, each variant structure put in place, together with the terms of the agreement it is operated within will have different implications for both income and capital taxes.

When contract farming agreements are examined in terms of tax, discussions usually focus around preserving the Inheritance Tax position of the landowner, with cases such as McCall (the denial of Business Property Relief on grazing land) and McKenna (an Agricultural Property Relief case which highlighted some of the failings of a poorly termed agreement) in the last few years putting the spotlight on the risks and rules that one can fall foul of when entering into such agreements.

Though the capital tax position is important and should not be ignored, so too is the income tax position which can often be overlooked as a result of the fear of any possible Inheritance Tax exposure. Where an agreement is expected to run for say five to ten years and there is not likely to be a succession in the period, there should be plenty of scope to bring income tax planning into the agreement. A cashflow benefit of many thousands of pounds each year for several years may well be more beneficial than the possible risk of an IHT bill on the slim chance of an early or unplanned succession.

With the fact that HMRC are moving the goal posts all the time with changes to legislation and the development of case law through the courts, there is also a strong argument to say that it is best to plan for the savings that are available to you now and not risk the carpet being pulled from under your feet in the future. The Office of Tax Simplification has already identified that the Inheritance Tax system is out of date and is in need of a root and branch review. No doubt there will be significant changes over the coming years!

Where it is anticipated that there may be taxable losses in the early stages of the venture, perhaps from allowances claimed on initial capital investment, it is valuable to put in place a structure whereby it is possible to utilise any taxable losses against other income streams.

A partnership structure would enable this sideways loss relief and the use of Limited Liability Partnerships can also limit the exposure to financial risk of the parties involved, ring fencing the capital invested in the joint venture from the existing business. Once trading becomes profitable it may be possible to then transfer the venture (or an interest in the venture) into a Limited Company to take advantage of the lower rates of Corporation Tax of 20% compared to the higher and top rates of Income Tax of 40% and 50% respectively.

With the CAP Reform yet to be agreed it is a challenging time for those trying to draw up agreements and make plans for the next few years as we do not yet know where the goal posts are. However, the CAP Reform has been a good prompt for all parties to review the agreements currently in place to see where they may be at risk. This provides a good opportunity to review the agreements overall, are they achieving what they were set up for in the first place and are they still correctly structured for tax purposes with the development in case law over the last few years?

For more information please contact Dan Knight on 01305 755659 or daniel.knight@oldmillgroup.co.uk