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23 April 2018

King West

Why are Contract Farming Agreements so popular?

Contract Farming Agreements have remained a popular vehicle for owners of arable land to manage that land. They are similarly popular with farmers, but why?

In such an arrangement the landowner, confusingly known as the “Farmer,” enters into a contract with a farmer, confusingly known as the “Contractor,” whose services are engaged in order to cultivate the land and to generate a profit. The business identities and trading positions for tax and VAT purposes of both parties are retained under this arrangement.

Benefits are found on both sides of these arrangements, but an in-depth understanding of the permitted requirements is key to a long-term, successful and legally compliant relationship.

A written contract sets out the duties of the farmer and contractor, including how income and expenditure are to be shared. However, there are several key factors which ensure the Contract does not inadvertently lead to a loss of valuable agricultural tax reliefs for the “Farmer”. These include the following:

  • The farmer must take ultimate responsibility for the cropping, and bear the entire financial risk of the growing crop.
  • The only guaranteed income is that paid to the Contractor, with any surplus after the costs of production usually being split between the Farmer and the Contractor at an agreed ratio.
  • The Farmer must pay for the direct inputs, such as seed, fertiliser and sprays; usually through a separate bank account into which all income is paid.
  •  In terms of generating an income, the Contractor receives a fixed, guaranteed payment from the Farm Account called the Contractor’s Charge, paid at pre-agreed intervals.
  •  The Contractor’s Charge typically covers the Contractor’s fixed costs on their equipment, however, might include an element of profit as well.
  •  Once the crops are sold and all costs accounted for, the net margin is split between the two parties at the percentage set in the Contract Farming Agreement (CFA). Typically, however, there will be a Prior Charge which is paid to the Farmer. Thereafter, the agreement between the parties defines how any residual profit is split.

A successful arrangement is one where the key rights and responsibilities are agreed from the outset; together with a mutual understanding of the statutory terms with which they must comply – for example, taxation arrangements.

Why are CFAs increasing in popularity? The benefits of flexibility and time management are clear. Other advantages mean that the Farmer avoids a tenancy or complex partnership. They also retain occupation of the farm and benefit from the ability to claim grants, whilst retaining management control. If exercised correctly, tax reliefs may also be available to the Farmer. Finally, should the Contractor operate over a large acreage, the Farmer will also benefit from economies of scale which the Farmer could not achieve, and therefore allow them to farm the land in-hand whilst retaining an element of profitability.

As Rural Surveyors with experience in Contract Farming Agreements, if you are considering a new way forward for your farm or farming business, please contact us for a no-obligation consultation, initially by email to hespom@kingwest.co.uk or by telephoning 01858 411970

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