Farm Ireland

Thursday 23 November 2017

Go contract farming to grow farms

Aisling Meehan

I have just returned from a trip to the UK as part of my Nuffield Farming Scholarship study. Having visited countless farms during the course of my travels, I was struck by the popularity of the contract farming structure as a way of facilitating expansion in dairy farming.

The way it works is as follows. A farmer hires a third party as a contractor. The contractor carries out all the work of animal and crop husbandry as an agent for the farmer. The farmer must make all key decisions about cropping or feeding and strategy, but the contractor can give advice and be involved in the decision-making process.

To keep the Revenue satisfied that this is actually a contractual rather than a pseudo rental or leasing arrangement, the farmer must be able to prove his or her involvement in the day-to-day management of the operation by means of minutes of meetings and diaries.

The land, dairy facilities and milk quota are provided by the farmer who remains in occupation of the farm. The management, labour, machinery and expertise are provided by the contractor. The dairy herd and youngstock can be owned by the farmer, but more often than not they are owned by the contractor, who leases the stock to the farmer. In return, the contractor receives labour costs, power costs, a management fee and return on any tenant capital, such as a rental fee for cows.

The farmer receives a 'first charge', which has been described as a rental equivalent and return on any capital. Whatever money is left after paying all of the above is called the 'divisible surplus.' This is split between the farmer and contractor, with the contractor getting the greater share to reward success and high performance.

Contract Farming vs other Business Structures

Contract farming should not be confused with partnership. The main difference between the two structures is that partnership requires partners to 'pool' all their assets together, whereas with contract farming, the farmer provides the main assets while the contractor works those assets. Also under the contract farming model, the farmer bears the risk, while under the partnership model the partners are jointly and severally liable for all the debts of the partnership.

It is important that the contract farming arrangement is worked as such and cannot be a guise for something else, for example a partnership or a lease. While it is important to seek professional advice before entering any collaborative farming venture, the following points can be used:

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•The farmer must be actively involved in the farming business. In practice, this means that the farmer operates the business bank account, has a proper record-keeping system, prepares full annual accounts showing sales and purchases, completes forms for subsidies and collects it. While the temptation may be there to allow the contractor to undertake some of these tasks, the danger exists that the contract farming arrangement could be viewed as something else if scrutinised by the Courts or the Revenue;

•Capital must be employed and at the farmer's risk. The farmer should also try to avoid selling all animals off the farm once the agreement starts;

• Invoicing from contractor to farmer must be regular, at least quarterly, and invoices must be paid on the normal commercial terms operated by the contractor;

•Inputs should be invoiced by the merchant direct to the farmer;

•All regulatory documents must be completed by the farmer and retained by the farmer on his premises;

•The farmer cannot have a guaranteed return. They must take risk, otherwise a fixed payment could be viewed as rent;

•The written agreement must be adhered to and the farmer's and contractor's accounts must reflect this.

If operated correctly, contract farming arrangements allow a farmer to claim their Single Farm Payment and avail of other Department of Agriculture and EU Schemes. Additionally, as the farmer is involved in the day-to-day management of the operation, he/she should retain beneficial tax status as a farmer for Capital Gains Tax purposes.

On the other hand, contractors have the potential to generate good fees for themselves, which they may ultimately use to make progress on the farming ladder. The model is sure to generate a lively debate at next week's Teagasc National Dairy Conference. See you there.

Disclaimer: While every care is taken to ensure accuracy of this article, solicitor and tax consultant Aisling Meehan does not accept responsibility for errors or omissions. Call 061 368 412

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