UK: Contract And Share Farming – Considering The Alternatives To Leasing

Last Updated: 26 July 2018
Article by Jennifer Stevenson

It is no secret that the increasing complexity of the regulation of agricultural holdings in Scotland is leading many landowners and farmers to consider alternative farming structures. Use of contract farming is already well established but there is certainly room for growth, and, recently there has been industry-wide recognition that share farming may provide a way forward for Scottish agriculture. Properly constituted share farming and contract farming agreements are not leases. For landowners who are looking to move away from the inflexibility of agricultural leases and considering structures that allow retention of control and growth of in-hand farming operations, it has never been timelier to consider contract and share farming. These structures may also offer a step forward for new entrants looking to join the sector.

Getting the right structure for your business will depend on many factors; to assess these it is important to look at the key differences between agricultural leases, contract farming agreements (CFAs) and share farming agreements (SFAs). We will also consider the impact on control, income, tax and subsidy under each structure. These are, of course, general comments and no substitute for specific advice.

Leases - The landlord relinquishes control and exclusive possession of the holding to the tenant – who farms as their own business. In return, the landlord receives a fixed income in the form of rent but he is not exposed to the risks of the tenant's business other than to the extent of rent and lease obligations. Subject to any permitted use restrictions or landlord reservations, control of the farming operation is handed over to the tenant who takes on the risk of the farming enterprise but reaps the benefit of any profit generated. In terms of tax, the landlord will pay income tax on the rent received and the tenant will be liable for any taxes incurred as a result of his or her trade. The landlord should meet the criteria for agricultural property relief (APR) for inheritance tax purposes. The tenant will usually claim the agricultural subsidy as a farmer and these will either be owned by the tenant or leased with the land by the landlord.

Contract Farming Agreements - The farmer (landowner) will engage a contractor under an agreement for services. The landowner remains the farmer in his own right. The objective of a CFA is for the farmer to control the farm policy and have the contractor supply services to achieve the farm policy objectives. Day to day, farming operations are carried out by the contractor under the farmer's control. The capital investment is supplied by the farmer and the contractor normally supplies labour and machinery. Under a true CFA, the financial return is not a guaranteed fixed income for the farmer. The financial return calculation will be set out in the CFA and is a matter of contract between the parties. Generally, the contractor is entitled to a fixed payment and an agreed proportion of net profit. The contractor will also be subject to any taxes incurred as a result of their contracting business. In terms of IHT and APR, the farmer should be able to claim 100% relief as occupier but the farmhouse itself may be at risk if it is not used in the business. The farmer will claim the BPS entitlements and will be subject to all taxes incurred as a result of his or her trade.

Share Farming Agreements – SFAs provide a solution where two farmers are operating separate businesses that can collaborate in respect of an enterprise on the same land. It may suit a farmer who is looking to retain management control and another who wishes to get on in the sector but lacks the necessary capital. Or it might be that each business has different specialisations and skills which are more effective working together than as one business. Under a SFA, both farmers operate separate farming businesses in respect of the same land. The agreement will govern the relationship and will set out day to day responsibilities and expectations. In terms of income, neither party will have a guaranteed income and in a true SFA the parties will share gross revenue (i.e. before costs) in whatever proportions are set out in the SFA. Each farm business will have its own separate cost base. For tax purposes, each farmer will have his or her own tax liabilities for their respective businesses. Subsidy claims are more complicated under share farming. Only one farmer will be able to claim BPS entitlements and the active farmer rules will need to be carefully considered to ensure compliance with the scheme rules. Particular consideration should be given to cross compliance conditions in a share farming operation given that more than one farmer is farming the land. The BPS income sharing will be a matter for negotiation between the parties and the arrangement formalised in the SFA.

Where a lease is the right solution, parties should not to attempt to "dress up" the arrangement to look like a contract or share farming arrangement when it is, in fact, hiding a landlord/tenant or tenant/sub-tenant relationship. Our readers will be familiar with the Land Court's recent comments on such paper exercises. There are important differences to each structure and, although at times, appear nuanced, the risks of getting it wrong can leave the parties with a very different contract to that which was intended. That runs the risk of uncertainty as to what rules apply and the potential for unintended consequences. Where there is a genuine place for a CFA or SFA, we expect to see many more farmers engaging in these structures to develop their businesses.

Professional advisors should be consulted to evaluate the best farming structure to suit your business needs, whether that be a lease, or a contract or share farming operation. It is fundamental that these agreements are properly drawn up and implemented to ensure that the intentions of the parties are reflected in the contract and, most importantly, carried out under the terms of the contract on the ground.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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