23 June 1995

Contracts out, FBTs in..?

CONTRACT farming has been one of the success stories of recent years, providing farmers and landowners with the flexibility denied them by the established tenancy legislation.

But will the advent of the new Farm Business Tenancy (FBT) from Sep 1 mean the days of contract farming are numbered?

Anthony Oliphant of consultants Laurence Gould suggests they might be. He lists nine points where he believes FBTs score over contract farming:

&#8226 Unlike contract farming, landlords income is simple and fixed, but subject to review under an agreed formula.

&#8226 A tenant can make improvements, knowing there will be compensation at the end of the tenancy.

&#8226 The landlord can let his land safe in the knowledge that the tenant will not claim security of tenure.

&#8226 The tenant, having more security than is normally the case under contract farming, may make plans and financial commitments.

&#8226 The tenant may take on the repairing and insuring liability, relieving the landlord of a management input.

&#8226 A landlord may allow, and a tenant may benefit from, the development of non-farming based activities.

&#8226 FBTs should be cheaper and simpler to administer.

&#8226 Contract farming has been more difficult to establish in livestock areas because of problems over stock and quota ownership and of monitoring performance.

"In view of the new potential offered to both sides, parties to existing contract farming agreements may be wise to consider converting to carefully drafted FBTs," says Mr Oliphant.

But Gary Markham of accountants Grant Thornton believes there is another side to the argument, which may make people think twice about FBTs. He lists the following:

&#8226 When land is let, the landowner is not trading so will not be eligible for retirement relief or rollover relief should the land be sold.

&#8226 Full inheritance tax relief will be available for land let under a FBT, but it must have been owned for at least seven years and farmed throughout that period. (The minimum period for contract farmed land is just two years.)

&#8226 Rental income is treated as Schedule A for tax purposes, whereas trading income (as earned by a contract farming landowner) is Schedule D. This will greatly restrict the range of expenses that can be offset against tax in the case of FBTs.

&#8226 Reclaiming VAT is similarly restricted under Schedule A.

&#8226 As investment income (rather than earned income) rents are potentially liable to a surcharge should this be reintroduced.

&#8226 The presence of Schedule D trading profits provides the potential for tax relief on pension premiums.

&#8226 If all the land is let, the owners trade in farming will be considered "discontinued" and any trading losses will be forgone.

Mr Markham agrees that FBTs will have many plus points in terms of simplicity and freedom to negotiate. But he disputes the claim that contract farming is not suited to livestock enterprises. "And while FBTs will be very useful for letting land on relatively short agreements, they will not normally replace contract farming because of the taxation reasons mentioned," he says. &#42

Gary Markham agrees FBTs will be useful, butsays dont forget

the tax implications.

Anthony Oliphant says Farm Business Tenancies are the way forward.