Mike Brady: Beware the pitfalls of farm partnerships
A well thought-out exit strategy needs to be built into partnership models for farm businesses
Ireland has a very fragmented pattern of land ownership. The country has a total land area of 6.9m hectares of which 4.5m are used for agriculture. There are 137,500 farmers so the average farm size is just 32.4ha (80ac).
This small farm size has been cited by the Department of Agriculture Food and Marine (DAFM) as a barrier to the viability of our family farms.
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Farm Partnerships have been promoted as the solution to this structural problem. There are two main categories of Farm Partnerships operating in Ireland today.
Firstly, there are Registered Farm Partnerships whereby two farmers come together, sign a partnership agreement and register it with in the partnership office in Dublin. Entering such a partnership allows both farmers to retain their individual identity when it comes to EU grants and payments but operate as a partnership in every other way. There are individual Basic Payments, two GLAS payments and of course the double TAMS. There are also a selection of taxation benefits to incentivise the farmer follow the registered partnership path. But there are one set financial accounts.
Secondly, there are Non-Registered Farm Partnerships commonly known as Tax Partnerships. These partnerships exist primarily because they cannot meet the criteria to qualify as Registered Farm Partnerships.
However, the toxic mix of maximising grants/subsidies, and minimising taxation has made the decision-making process much more complicated for many farmers considering such arrangements.
The new trendy question in Irish agriculture is to ask a farmer, what's your farm business trading structure?
The business could be trading as:
a sole trader
registered farm partnership
a tax partnership
a limited company
an unlimited company
a group structure or
a combination of the above. The combinations are endless.
A whole new industry has developed around the creation, ongoing advice and dissolving of such trading structures. Agricultural consultants, taxation advisors, valuers and solicitors with this specialist agricultural knowledge are in high demand for such assignments.
Getting the best advice on maximising grants / subsidies and minimising tax is all very good, but farmers must not lose sight of the fact that the trading structure must be simple and easy to work on the ground in the day to day management of the farm business. One does not enter such an arrangement just to get a double grant on a new shed! Unfortunately this is the motivation for many farmers.
Poorly informed farmers run the risk of serious BPS penalties, loss of grants and taxation interest and penalties from poorly constructed or operated trading structures.
Many accountants and taxation advisors have poor knowledge of DAFM schemes / grants and many advisors have poor knowledge of trading structures and tax, this is a dangerous situation.
Every farmer should ask the question has my consultant/advisor ever met or spoken to my accountant?
In my experience the most important meeting for a farmer considering a new or change of trading structure is to get his consultant/advisor and accountant/tax consultant all in the one room to plan the set up.
It is vital that everybody is singing from the one hymn sheet from the beginning. You will also see which who is swimming without their shorts on when it comes to good experienced advice. Beware those ploughing a new furrow and using you as the guinea pig.
In my experience all trading structures and/or farm partnerships have a lifespan. What appears to be the perfect fit today may not be so in one, five, ten or 20 years-time, the arrangement will end one day. This fact has to be accepted and planned for from the start - knowing the exit strategy is the key to a successful arrangement.
The recent announcement of the proposed ceasing of the Greenfields Farm in Kilkenny illustrates this point. An exit strategy must now be implemented for the dissolution of an agreement ending long before its intended end date.
The Greenfields project run by Teagasc was truly an excellent project. It achieved what it set out to achieve by proving that a dairy farm could be set up and run profitably on leased land.
There have been many lessons learned by farmers, advisors and the industry as whole along the way. Perhaps the biggest learning is yet to come in the amicable dissolution of the farm business.
I am undecided if the focus on incentivising registered farm partnerships by DAFM is a solution to land fragmentation or a legal instrument that spawns complicated trading structures to maximise grants and minimise taxation.
From the very start of Registered Farm Partnerships the majority of the arrangements are family partnerships. Are these really resolving the land fragmentation issue?
Every farm business has its own set of individual criteria so it is vital that farmers entering a partnership gets the best of advice and has a good experienced team on his side.
Mike Brady is managing director at Brady Group agricultural consultants & land agents; email: firstname.lastname@example.org
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