Share farming rises up agenda as a farm structure choice
Drilling spring barley © GNP Once used mainly in livestock and dairy systems, share farming is now a common joint venture arrangement in arable too, as practical, financial and tax pressures present new challenges to farm businesses.
Farm consultants are overseeing an increasing number of agreements year on year as farmers grapple with labour shortages, high input costs, cashflow challenges and succession issues.
The current period of transition is fuelling that momentum, says Sam Dale, rural associate with GSC Grays.
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Share farming was once uncommon on arable farms, where contract farming agreements (CFAs) have been the preferred joint venture, but that is changing, says Sam.
“We are seeing share farming agreements more widely considered because the CFA model requires the landowner to provide funds to cover all the variable costs and pay the contractor largely upfront, which means more working capital to get everything off the ground, and that is becoming more of a challenge.”
In contrast, share farming sees each party contributing a share of the resources, whether that is labour, machinery, land, buildings or input costs, and sharing the returns in the agreed proportions.
Mark Shepheard of farm adviser Laurence Gould Partnership is seeing that shift, too.
“There were some share farming agreements on arable units when I started working in this job in 1989, then it went almost exclusively to contract farming agreements.
“But in the past five years, share farming agreements have become more popular.”
In general terms, share farming is an approach where both parties use the same land at the same time for the purposes of farming.
Each is in business on their own account for tax and legal purposes.
The expectations of both parties must align, with absolute clarity on the risks and the rewards from the very start – where agreements fail, the absence of these elements is often a key reason for the failure.
One of the potential problems is farmers not understanding exactly how a share farming agreement works, and in particular how it differs from a CFA.
Having a fair structure for both parties is crucial, says Mark.
“Share farming clearly needs to work for both parties. Often when it doesn’t work for one party, it doesn’t work for either.”
Poor administration is another reason why some fail, he adds, and so is poor performance – some farmers are overly optimistic, or may not understand the limitations of the farm.
First step
The first step in a share farming arrangement is to get the agreement document itself right for the parties and circumstances.
It should detail clearly the responsibilities of each party.
All must have a clear understanding of the content – what is included, what isn’t, and exactly what each party is providing; this is used to determine the percentage division of income and expenses between the two farmers.
For example, in a dairy agreement, it is unlikely that one party will be providing the silage-making equipment.
The expectation will be that the operation will be carried out by an outside contractor and treated as a shared cost, says Mark.
Fine details need to be considered, such as whether the share farmer is responsible for transporting calves to the mart, or whether a third party will be used and how the cost may be shared.
Having clearly defined terms avoids future disagreements and gives clarity to issues that could potentially arise in the first year.
Trust is fundamental, so agreements often work better between parties that are already known to each other.
One agreement that Mark oversees is now in its 17th year.
A good, clear budget is important, so that the parties understand the financial mechanics – essentially who will be paid what and when.
A range of budgets
The budget doesn’t need to be complicated, but in addition to that original budget, Mark recommends preparing two additional versions – a highly optimistic one to understand how rewards will be reflected, and another that is more pessimistic, to draw awareness to risks.
Share farming agreements are normally on land that is owned by one of the parties.
Tenancy terms may prohibit an agreement to work on a shared basis, so a CFA may be more appropriate in these circumstances.
Regular communication between both parties in a share farming arrangement is crucial. Meetings are essential and are often monthly or quarterly.
These can be brief but need to be organised with agreed action points clearly recorded, Mark advises.
“When things go wrong, it is rare for it to happen suddenly.
“It’s mostly due to an accumulation of issues, but regular communication allows everything to run smoothly with no surprises,” he says.
Share farming is a favourite joint venture model in livestock businesses because it allows a good route into agriculture for new entrants, as capital costs can be low.
Sam says a new entrant sheep farmer could become a share farmer with only a quad bike and a few sheep, and these are often individuals with aspiration but little initial capital to enable them to increase stock numbers by themselves.
The drive and experience they can bring to the business are valuable for pushing it forward, while giving them the chance to build up capital from the profits the farm makes.
The farm owner benefits too, says Sam.
There is a high level of business restructuring being considered, and a share agreement widens the options.
“Share farming pairs that new entrant with a landowner who has the land and livestock base but can’t or doesn’t wish to continue day-to-day farming.”
Legal considerations of share farming
A share farming agreement contract is commonly drawn up by a solicitor.
Sarah Jordan, a rural property law partner at solicitor Moore Barlow, says there are a number of key components to consider.
Duration of the arrangement
Sarah has prepared agreements that range in duration from a single year to 10, with break clauses included in the longer-term agreements.
The longer the term, the more opportunity it presents for parties to make decisions such as entering land into environmental schemes.
Division of income
This is bespoke to each business – lawyers are mostly guided by accountants on this aspect.
“Accountants are helpful on the calculations and percentage splits, but it is also something that parties themselves might have agreed on.”
Responsibilities for managing the land
It is mostly the share farmer who agrees to actively manage the land, to maintain and repair it, and the landowner who provides the land, buildings and equipment.
Agreements often mirror what might historically have taken the form of a tenancy.
“We now see more share farming agreements than tenancy agreements coming into play, but landowners should very much be led by tax planners on this.”
Dispute resolution mechanism
Agreements normally define which expert should be used in the event of a dispute, mostly a Royal Institution of Chartered Surveyors surveyor with experience in dealing with share farming agreements, to ensure there is an independent third party to facilitate a resolution.
“That mechanism for bringing in an expert is important for dealing with disputes independently, instead of going through a court.”
Specification of rights for the farmer and landowner
This commonly includes land access rights – for example, if the landowner has sporting rights over the land, the agreement might point this out so it is clear this right can be exercised.
Share farming tax considerations
Taxation including inheritance tax (IHT) and VAT can be more favourable in share farming than in alternatives such as letting out land.
Andrew Robinson, senior agricultural partner at accountant Armstrong Watson, says this is because HMRC regards share farming as a trading activity.
In so doing, it satisfies the Balfour test – a benchmark of the need for a business to have at least 50% trading activity to qualify for business property relief.
In contrast, the rental income from let land isn’t viewed as trading income, which makes the required balance between trading and investment harder to achieve, says Andrew.
“For the landowner, share farming is treated as if the owner was farming the land themselves therefore their share of the income, profit and costs sits on the trading side of the Balfour test.”
On income tax, share farming is not treated as a partnership, therefore the landowner and farmer will include their share of revenue, profit and the costs in their own accounts.
Each party recovers their own portion of VAT paid on business expenditure, Andrew advises.
“If, for example, they share vet bills, both parties will recover their respective shares of VAT incurred on that outgoing.”
