Share farming is relatively unusual and can be distinguished in that both the landowner and the share farmer are regarded as separate occupiers of the land, each occupying it for the purposes of farming, so there are two farming businesses operating on the same land. These businesses operate separately, but their combined efforts result in the agricultural output of the land (eg, grain, milk, meat or wool). Each party is then rewarded by a pre-agreed share of the value of the gross output. The agreement between them will define their separate activities and responsibilities, specifying who is liable for which costs, such as maintaining fixed equipment or providing fertilisers.
Each business will have its own bank account, will prepare its own entirely separate business accounts and will be responsible for its own tax and VAT returns. Typically, the share farmer provides the working machinery and moveable equipment, while the livestock is usually held in undivided shares. The landowner provides the land, fixed equipment and fixed machinery.
Contracting arrangements are much more common. The terms of a contract farming agreement (CFA) are relatively well known, although each one should be tailored to the circumstances of the parties involved. A landowner will engage a contractor to carry out defined works. The contractor will provide certain elements of the labour and machinery to grow the crop or look after the livestock, the landowner will provide the land and pay for the inputs. The permutations of the arrangement are almost infinite, ranging from simple but specialised one-off arrangements such as hedging or drainage to more sophisticated schemes where the contractor is deeply involved in the management of the land, often for a period of several years. In these cases (sometimes referred to as “whole farm contracting” (WFC) arrangements) it is normal that the contractor’s overall remuneration will be partly determined by the profitability of the crop, so will share in the “divisible surplus”.
Normally, the contractor will order the seeds, fertilisers and sprays for use on the contracted land, and these will be paid for from a special “number 2 account” which the landowner provides and to which both parties have access. In some smaller cases the contractor may instead provide the inputs to the landowner directly, charging throughout the year as the inputs are provided. The key common factor of all these arrangements and the feature which distinguishes it from a rental arrangement is that the landowner will own the crop, participate in the management, be responsible for buying the inputs and effectively bear an element of risk.
From the landowner’s perspective, the attraction of contract farming is that he can continue to enjoy the fiscal advantages of farming without necessarily needing to undertake all the work in person. This may be particularly appropriate where there is a need to release capital tied up in machinery, where the landowner is ageing and no longer physically able to do all the field work, or sometimes as a temporary measure where, perhaps, there is an untimely death and a short term arrangement is required until the next generation can take over the running of the farm.
Where such agreements are properly constructed, with regular meetings between the parties, participation by the landowner in management decisions and, above all, an element of risk for the landowner, HMRC will not normally look to deny that the landlord’s profit share is earned income and that CGT and IHT treatment will follow. In the IHT case of Arnander v HMRC (2007), a poorly drafted badly administered contracting agreement (amongst other reasons), led to the disallowance of APR on a substantial farmhouse.
HMRC's manual currently states:
“In practice, however the agreement is described, you will need to ascertain the precise terms of the agreement, as a starting point. You should obtain copies of any written documents which provide evidence of those terms. You will also need to be sure that whatever was agreed between the parties and whatever appears in any written agreement accords with what was actually happening on the ground. In exceptional cases this might ultimately involve obtaining written evidence from all the parties involved.
While the existence of a Share or Contract Farming agreement is unlikely to affect the availability of agricultural relief on the farmland, it may have an impact upon any the relief available on the farmhouse. This is a question of fact and degree to be decided in each case and may involve consideration of aspects such as
- the degree of financial risk for the deceased
- the deceased’s involvement in the day-to-day agricultural activity including the regularity and scope of any meetings with the share / contract farmer
- the deceased’s involvement in decisions relating to the selection of crops, sowing, harvesting, sales, and so on.”
As a result of the financial pressures within the industry and as the impact of subsidy reform starts to bite, it seems likely that such arrangements will become even more common as smaller units are effectively consolidated into wider operating entities. It is essential to ensure that a proper agreement is in place, and perhaps even more importantly, what happens on the ground reflects that agreement.
*The views expressed are the author's and not ICAEW's