As we approach the end of harvest for another year thought turns to taking stock of the year past as well as planning for next year and beyond. This is a busy time of the year for us in the office as we are reviewing our Contract Farming Agreements (CFA’s), producing annual reconciliations and holding pre drilling meetings to instruct contractors for the season ahead. What is becoming more and more important is that CFAs are correctly drafted and implemented. It is clear that HMRC are now looking very closely at not only the formal agreement but also the practical implementation of the agreement. A number of cases now exist where a CFA has not been implemented properly and as a result the benefits of using such an agreement have not been fulfilled, often leaving the landowner/farmer or their family significantly exposed to taxation.
The simple exchange of cheques once a year will no longer be good enough to demonstrate proper use of a CFA. The farmer/landowner needs to show evidently that they are still taking financial risk from the enterprise, and not simply receiving a ‘rent’ through a false agreement. Essentially the theme of the agreement should clearly demonstrate that the Farmer is “farming with contractors”.
It is essential that meetings are held, ideally quarterly, and that they are recorded. A dedicated CFA, number two, bank account needs to be setup, funded and managed regularly by the farmer. Profit share arrangements need to be agreed in advance of crop planting and be detailed within the written agreement. If insufficient profit is made, then the farmer’s return will be at risk and reduced accordingly.
As part of demonstrating that the farmer is partaking in the risk of growing the crop, subsidy income should form part of the income. It is also key when planning the cropping with the Contractor that any ‘Greening’ requirements and Ecological Focus Areas (EFA’s) are met. With alterations to the Greening rules in the last few years we are taking the opportunity to review EFA plans with farmers to better utilise that land available for cropping.
As a business we have dedicated team of farm secretaries running CFA accounts for many farmers. This allows us to offer a complete package service, by working closely with your accountant and solicitor to ensure that you remain compliant with the latest legislation to remain actively farming the land. With the increasing scrutiny HMRC are subjecting these agreements to it is essential that not only do you have a proper and robust agreement in place, but it is actually run and implemented in full accordance with the agreement made. The loses from not complying are significant and will be costly.
Get in touch with Andrew Jamieson, Partner, and his team by calling 01361 883488, alternatively, email firstname.lastname@example.org
The reform of the CAP in 2005 allowed freedom of cropping/stocking and removed the years of headage and quota payments but inadvertently, created little incentive for landowners to let land under formal tenancies for any duration of time. Allied to the incentive of roll over relief for those selling development land and 100% inheritance tax relief (either BPR or APR), there has been a significant shift away from Farm Business Tenancies (FBT’s) to contract/share Farming Agreements (CFA’s).
CFA’s which run well are all about a working partnership with mutual respect for both parties roles within the agreement. We find that at the end of the day, the returns create an even balance and split of the profits with neither one party seen to be the better off. This balance is so often lost with formal tenancies when rents are reviewed at various intervals and in reality, just depends on the price of wheat/livestock at that moment in time. Tenancies have never really been able to react as market forces react on a year to year basis and there isn’t really an approach that considers yields, prices and inputs as much as a contract agreement does.
We’ve also found that once the contract agreement is operational, very few see changes in contractors and that’s down to the better working relationship between all. Of course, CFA’s come with more hassle and management and income only at the end of the trading year as opposed to regular intervals, but as we move forward in more uncertain support payment times, relationships between owner and contractor/farmer are more and more important. Also remember that CFA’s aren’t difficult to run, so don’t get carried away with management fees charged by some consultants who often see them as a gravy train.
We’ve seen a significant increase in contract agreements recently, particularly in the livestock sector; it’s more challenging as we have stock ownership to consider but I think it’s in part a recognition that the economies of scale in the cattle and sheep sector can drive significant cost savings and increased outputs, leading to more direct income to the farmer by use of a contract/share farming agreement.
Having said all of that, I anticipate that we are likely to see landowners considering, once again, letting land back out under tenancies in order to avoid potential capping on future support payments. Given that, I suspect many rely on this income to manage/prop up the estate, therefore it would seem more logical to let the land back out and allow the smaller tenants to expand a little and just receive the subsidy through rent rather than be capped. I do think though that landlord and tenant need to find a more fair basis of rent that reflect what is actually happening on the ground in that harvest year.
Finally, if you’re not aware, please take careful note of the major changes with EFA’s announced this week; the impact particularly on using pulses for EFA areas is great and may require some careful cropping plan adjustments.
Louis Fell, Partner