Farmers setting up contracting agreements should take care to show that they are still farming as part of a trade or business, following a recent court case in Scotland.
The case – Fyffe v Esslemont – concerned a tenant who had contracted out his farming activities, and has implications for similar situations in England and Wales, according to the Central Association of Agricultural Advisers. “The courts found that a secure Scottish agricultural tenancy lost its statutory protection because the tenant had substantially abandoned use of the farm for agriculture for the purposes of a trade or business,” explains Jeremy Moody, secretary and adviser to the CAAV.
This was partly because the arable contracting arrangement used by the tenant was found to be a sham, which left the contractor with a free crop of spring barley after an exchange of paper invoices. The sham agreement had been designed to avoid looking like sub-letting, which was forbidden under the tenancy, but the court found that the tenant was not exposed to any business risk and described the arrangement as an entirely artificial paper exercise.
The farm tenant had also set up sporadic grazing lets which the Court found to be inadequate. They did not constitute the sale of grass and there was no evidence that the tenant undertook any management to maintain the quality of the sward, with all work done by the graziers.
“The Court asked if the agricultural activity on the land was part of the tenant’s trade or business and found it was not – it was conducted on a day to day basis almost entirely by others,” explains Mr Moody.
While this case revolved around the protection of an agricultural tenancy, other cases have shown that farmers can lose valuable agricultural tax reliefs by not actively farming. “To benefit from the status of being a farmer the farmer must take responsibility for positive husbandry of the land,” he adds. “That can be delivered through properly managed, genuine contracting and grazing arrangements.”
Such agreements should constitute a formal contract, regulating the rights and responsibilities of the parties. “This means getting the business deal right, recording it in the agreement and then following it in practice. This is not about labels, but realities.”
In its decision on the case, the Scottish Land Court described some of the key points of “true contact farming”:
- a form of contract for services under which the landowner engages an individual or corporate entity to farm the land on his behalf
- normally the contractor provides the labour and equipment
- the extent of the contractor’s discretion is a matter for negotiation in every case
- the normal consideration payable to the contractor is a fee that may have a profit related element
- the farmer assumes risk with regard to his income
- the only guaranteed payment is that to the contractor, with any surplus after the other costs of production have been met split between the farmer and the contractor according to an agreed ratio.
- if the contractor orders the inputs on behalf of the farmer, the farmer will pay for them, often through a separate bank account into which any resulting income is paid.