Farm Ireland

Friday 24 November 2017

Understanding share farming

Aisling Meehan

THE EU's renewed focus on targeting payments at active farmers and insistence on persisting with reference years to benchmark payment levels has spurred renewed interest in shared farming.

On one hand, some land-owners that have been letting or leasing out land feel the need to be more actively involved in the farming operations to safeguard their entitlement to a single farm payment. On the other hand, farmers who have relied on taking on extra land through rents or leases are looking for ways to spread some of the risk, while at the same time offering land-owners competitive rates.

Share farming is where two parties -- the landowner and share farmer -- carry on separate farming businesses on the same area of land. It operates on the principle that the share farmer and owner, although farming the same land as individual businesses, have separate incomes and separate expenses to calculate their individual profits. A share farming agreement blueprint was launched by Teagasc in 2009, which draws inspiration from the similar models established in Australia, US, and the UK.

It marries elements unique to Irish agriculture -- including Government support schemes and the tax system.

The details of the arrangement should be set out in a written contract. Share farming can be fully compliant with EU and Government support schemes, including Single Farm Payments and REPS.

The Revenue commissioners are satisfied that landowners participating in legitimate share farming agreements continue to be classified as 'farmers' for the purposes of tax relief (see the table, right).

Share farming is a contractual arrangement between two independent businesses. Care has to be exercised by the parties to the share farming agreement to ensure that the arrangement cannot be construed as some other legal structure, such as a partnership, a letting or leasing of land or an employer/employee relationship. For example, there should be no fixed payment for the land otherwise the structure may be construed as a letting.

Whatever arrangement is entered into, it is essential that it records what is to happen in practice and that the parties stick to those arrangements.

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Otherwise, there is a risk that a partnership or a tenancy will have been created instead, which could give rise to serious legal or tax implications for the participants. For this reason, share farming should not be seen as conacre in another guise as a retirement mechanism for landowners and neither party should go into a share farming agreement with this in mind.

The share farming agreement published by Teagasc covers tillage, beef and sheep enterprises but concludes that the structure of the milk quota regime at present does not facilitate the operation of share farming arrangements in the dairying sector.

A typical arrangement will involve both parties as follows:

•A landowner provides land, buildings, fixed equipment, major upkeep and repairs. He also provides management and farming expertise.

•A share farmer provides mobile machinery, his labour, management and farming expertise. Either or both parties may also agree to make a financial contribution to the other party measured by reference to his EU or other entitlements. The share farmer and landowner, on the basis of a budget, agree to divide the farm produce between them along certain percentages.

There is no guaranteed return to either party. Each of the parties is a risk taker, with the percentages in which the fixed and variable costs are allocated to each party in a written contract entered into before the venture commences. Variable costs such as fertiliser, seed and chemicals could be carried on agreed percentages. For example, 50pc of the fertiliser paid for by the landowner and 50pc by the share farmer.

Alternatively the landowner could pay for all the fertiliser and seed while the share farmer could pay for all the chemicals.

Fixed costs such as labour, insurance and repairs should be carried by the relevant parties. As each party is running his own business, it is essential that separate insurance covers are taken out.

It has been suggested that a share farming system can work well where a large mixed farmer with tillage, failing to get the best out of his tillage enterprise, can benefit from entering into a share farming agreement with a specialised tillage farmer. Likewise, small tillage farmers may also benefit from entering a share farming agreement with larger tillage farmers through machinery availability and better bargaining power with merchants in buying inputs and selling outputs.

As with all systems of collaborative farming, trust between the parties is key. Calculating a budget for the crop/enterprise will form the corner stone of the arrangement. Teagasc's share farming agreement can serve as a prompt for aspects of the arrangement which should be agreed as follows:-

•The duration of the arrangement;

•The exact lands to be provided by the landowner to include the area and LPIS numbers;

•Any machinery necessary and who will provide it;

•If livestock are involved, who should provide same. The local DVO will advise on the herd number situation for a particular case. Normally the local DVO will insist on just one herd number if the landowner has stock that are going to be with the share farmer's stock.

•A basis for the division of costs and produce;

•If EU/Government supports are being made part of the agreement, those being contributed by each party should be listed;

•How produce is to be stored, marketed and sold;

•Procedures for resolving any disputes between the parties.

It has been well documented that the viability of Irish farming will depend, amongst other things, on farmers being able to increase the scale of their operations. Share farming can provide a means of increasing scale of operation, driving efficiency, increasing profits and lead to an improved lifestyle.

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. Tel: 061 368 412

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