Farming businesses operate increasingly within a complex legislative framework. Farmcare's David Gardner guides you through the maze.
Know the law. Ignorance is not a defence.
You can't be "nearly" compliant with legislation, nor can you be "nearly" compliant with the terms of any form of contract.
Whether between you and a buyer, supplier, service provider or government, it is an agreement that binds and limits your actions.
Virtually everything that happens on the farm today is subject to the law and the only way to assess your risk of non-compliance, in other words breaking the law, is to get appropriate advice, preferably on an annual basis.
That may require the services of more than one adviser to help assess exposure to risk and the changes in legislation.
The nature of your relationship with an adviser - accountant, lawyer or specialist consultant - may need to change as the legal framework in which farm businesses operate changes.
Risks are too many and varied to deal with them all in this module but here are the key areas.
Business structure
Owning, running or directing a business will impose certain responsibilities, liabilities and risks upon an individual.
These will depend upon the legal structure of the business.
Different business structures can limit an individual's personal risk and an inappropriate structure can expose the individual to unnecessary risk.
1. Sole traders
The majority of farm businesses are sole traders, limited liability companies or partnerships.
Setting up as a sole trader is a relatively simple route into business.
However, sole traders are self-employed and responsible for the legal and financial operations of their business.
As a legal entity the business and proprietor cannot be separated.
Therefore the proprietor is liable for any debts the business may run up to the full extent of their private estate.
They are also liable for any legal actions taken against them as a result of trading activities.
Investing substantial amounts of capital into a business as a sole trader may be a high-risk strategy.
2. Limited liability companies
Limited liability companies are registered with the Registrar of Companies at Companies House and regulated under the Companies Act 1985 and 1989.
A limited company has its own legal identity - distinct from those who own and control it.
Therefore any liability arising from trading activities rests with the company and not the owners.
However, a director can still be held personally liable if he exceeds the extent of his powers.
3. Partnerships
Partnerships can be risky.
A survey in East Anglia revealed that more than 40% of collaboratively-founded firms split up leaving only one of the original co-owners.
Disputes between partners can cause difficulties and if allowed to escalate could end the partnership.
A Deed of Partnership, drawn up by a solicitor, can reduce the risk of disagreements and dissolution.
It is a legally binding agreement between the partners, which defines how the partnership will be run and the rights and duties of each partner.
If the partnership doesn't have a Deed of Partnership then it will be governed by the Partnership Act 1890.
This may not provide solutions for many of the problems that arise and it may not suit the way partners want to work together.
4. Directorships
Taking roles on boards of outside business, co-operatives or similar organisations as non-executive directors is now quite a complex area.
Advice needs to be taken to assess and understand additional risks and responsibilities.
Contract farming
Historically, farm businesses have been operated on a combination of tenanted and owner occupied land around a central steading.
Not so today.
Now a typical farm will have a range of straight tenancies, FBTs, contracts, joint ventures and shared operations.
Labour might be employed directly, brought in via a ring or a gangmaster.
It might be UK or overseas in origin.
In short, today's farming business has a complex structure that multiplies risk.
To start with, a Contract Farming Agreement (CFA) is a contract between a land owner and a farm contractor.
The contractor may manage the farm day-to-day and provide technical advice, but the landowner is the farmer and ultimately the decisions rest with him.
So the farmer (the landowner) owns the growing and stored produce.
There is a risk that the landowner may not be considered to be the farmer by the Inland Revenue.
To avoid this the landowner will need to demonstrate that they are involved in the decision-making process, are exposed to a degree of risk in the business, that invoices are raised by the separate businesses involved and that there are separate bank accounts.
To avoid difficulties the contract needs to be clear, thorough and realistic.
It should set out the duties and rights of each party.
Agreements should be professionally drawn up covering all aspects of payment and responsibility.
The terms of the contract can be altered by communications (informal and formal) between the parties but ensure that changes are documented and that regular meetings are held where issues can be discussed, actions agreed and decisions taken.
The risks
CAP reform has thrown up a number of potential legal risks around compliance and accuracy of mapping.
The whole single farm payment is at risk if you fail to get applications right in even a small part of the claimed area.
Additionally, risks lurk in new CAP and WTO reform developments.
Only by keeping fully abreast of developments can risk be mitigated.
Operational risk
Legislation and protocols regulate the day-to-day operation of your business.
Failure to comply with operational legislation could result in personal injury, prosecution, fines, imprisonment, poor reputation and cost recovery by a government agency to name but a few
Quality Management
Implementing a Quality Management System (QMS) can help ensure that you comply and stay compliant with operational legislation.
A QMS uses a cyclical process of implementing, changing/refining and auditing work processes to ensure that they met defined performance standards.
A QMS needs to have defined performance targets and possibly Key Performance Indicators (KPIs).
The lowest performance standard has to be the minimum required by the law but you may need to incorporate the standards set by Quality Assurance schemes or Producer Protocols and incorporate voluntary standards.
Comparing the results of the auditing and reviewing process with the required performance targets will identify areas where improvements need to be made.
Diversified businesses
Diversified enterprises bring with them a whole range of legal risks.
Without prior experience or expertise in new areas of activity, or the legislation that regulates them, you may be vulnerable.
To mitigate the risks, recognise the areas where you lack expertise and knowledge and seek adequate, professional and competent advice, particularly in areas involving planning, building regulations, food retailing, public liability and trading standards.
Many farm diversification projects will involve some form of food processing, retailing, or preparation.
To ensure that food is safe to eat, anyone preparing, processing or retailing food will need to manage food safety.
Hazard analysis
The most common system used in the food industry is Hazard Analysis and Critical Control Points, or HACCP.
It is a recognised system that has been developed over the past 30 years and is used worldwide.
It is a practical and flexible method, which can be used to meet the requirements of food and safety legislation and can also be used to deliver the safety and quality requirements of customers.
It may help you win and maintain preferred supplier status with customers.
Implementation of HACCP-based procedures demonstrates an operator's commitment to food safety; improves employee awareness of their role in protecting consumers, and emphasises management's responsibility for food safety throughout the process that is under their control.