Contract farming arrangements – another little tripwire

As readers will be aware, contract farming arrangements in one form or another are the lubricant which enables the industry to function smoothly. At one level, they are simply a way to enable neighbours to help each other out or share the expense of running specialist machinery. At the other end of the spectrum, and particularly in the arable areas, there are sophisticated agreements which, having originally been developed as a way of avoiding the creation of a tenancy, now provide a mechanism to enable landowners to enjoy the benefits of land ownership without necessarily being involved in day-to-day decisions and responsibilities.

The arrangements of a Contract Farming Agreement (CFA) or whole farm contracting arrangement (WFC) are relatively well known, although there are probably almost as many financial permutations as there are agreements. In essence, the landowner provides land and working capital and the contractor brings his machinery and expertise. There is normally a “number 2 account” which deals with the contact farming income and expenses and, at the end of the day, profits are divided, with each party taking a fixed share of profit (the ”prior share”) and then splitting any residue as a “divisible surplus”.

For tax purposes, CFAs are effective but only if they are both properly constructed and executed. The point was examined for IHT purposes in the Rosteague case (SpC 565) where, despite a purported contracting agreement, it was clear that the arrangement was little more than a thinly disguised rental agreement. The landowner’s share was the same every quarter, was sometimes described as “rent” in the cashbook and the contractor rather than the landowner claimed the subsidy payments. In contrast, in Charnley [2019] UKFTT 0650 (TC) there was a purported grazing agreement which should have rendered the farm ineligible for BPR but the level of services provided by the landowner were such that he was deemed to be farming, paperwork notwithstanding.

Clearly, where CFAs are being used, it is important that the landowner properly carries out his responsibilities. He should take an element of risk under the terms of the agreement, and he should be involved in management decisions such as forward sales, cropping plans and business strategy. If he can also provide some services within the terms of the agreement, such as stewardship management, hedging, ditching etc., that would also be helpful.

A recent change in the DEFRA rules on Plant Protection Products (PPPs) may also be relevant. Since 22 June, any business using PPPs, even if they are applied by a third party, must register details on a new database – those who “have professional PPPs and any adjuvants applied by a third party as part of your work in agriculture, horticulture, amenities or forestry” will come within the scope of these new rules. Failure to comply will lead to a tiered level of responses from DEFRA, starting with “helpful advice” and potentially ending in prosecution.

Aside from the simple compliance aspect, it appears that this is the sort of evidence which would be very helpful if the reality of a CFA were to be called into question. Conversely, failure to comply (probably in conjunction with other evidence of a “hands off” approach) might be unhelpful if the arrangement were to be called into question.