What do I need to know?

Benefits of this model for the contractor

It is a commercial way to focus on farming professionally whether primarily a farmer or a contractor without carrying the cost of the land in question.

It can provide a large volume of • work and income to help carry the cost of machinery and labour provided the contractor prices this on a sustainable basis aware of the risk as well as potential rewards.

A contractor can have several • agreements with different farmers at the same time and whilst being the farmer on the contractor’s own land.

A contract done well will help win • others.

Remuneration

Within a CFA, remuneration for both parties is generally dealt with on a profit share agreement based on output.

Both parties would receive a prior • or first charge. The contractor’s sum will often be based on a slightly below market value figure for the work to be carried out. This figure is then usually replicated and becomes the farmer’s first charge.

This method ensures that both • parties receive a basic return but in order to achieve a higher return, they must strive to work together to maximise yield through good management, husbandry and marketing.

This margin (over and above the • basic return) is called the divisible surplus. It can be split equally or by a differing percentage (which has been pre agreed at the start of the agreement) and is paid out once all sales from a given farming year have been taken into account.

Good CFA housekeeping

In order for a farmer to qualify for favoured rates of IHT, CGT, FBR, BPR they must be seen as an actively trading farmer by HMRC. To this end, there are a number of criteria that HMRC would look for to ratify that a farmer is still trading under a CFA:

Whilst a good contractor may be • capable of carrying out not only the practical work but most of the day to day and strategic management within the agreement, the farmer must be involved in the decision making processes including; cropping planning and the purchase of inputs and sales of produce.

At least two formal meetings

• must take place each year at the farmer’s home with a set agenda covering these points. Subsequent minutes of the meeting should be kept on file and be circulated to all parties afterwards.

Purchase of inputs and sales of

• produce must be transactioned through the farmer’s bank account. In a CFA, a second farm bank account, known as the number two or contracting account should be set up. This is separate to that of the farmers own account.

Where at all possible inputs

• should be purchased in the farmers name and invoiced to the number two account. Where a contractor purchases inputs on the farmer’s behalf, these should be re invoiced to the number two account.

Produce sales should also be • made in the name of the farmer with corresponding accounts set up at merchants. A contractor may buy produce from the farmer (crops in store for example) but only at market value and with a clearly defined paper trail. Purchase standing crops is not encouraged but may be acceptable under certain circumstances.

VAT charged, paid and reclaimed • relating to CFA should come from and be paid back into the number two or contracting account.

A flexible approach to farming

A well set up CFA is a practical mechanism which allows a farmer to continue to trade, retain management control of his land and be tax efficient. It negates the worry of reinvestment in infrastructure, machinery and labour and allows flexibility in both the day to day and strategic planning of a farming business. n

David Hurst