Joint ventures are on the increase as farmers search for ways to become more efficient and grow, or ease back from the daily grind.
We ask the experts for a guide through some of the practical considerations.
What is a joint venture?
Joint ventures (JVs) in farming cover a wide range of collaborative business arrangements. There are three common types:
- Contract farming The most established JV is a contract farming agreement (CFA), which gives landowners an alternative to farming the land in-hand or leasing it out to anyone else. It is an agreement between the farmer/landowner and a contractor where the farmer provides the land, buildings and fixed equipment, while the contractor provides services to the farmer, such as labour, machinery and management expertise. The contractor is paid a first charge for their services, but also gets a percentage of the profits, known as the divisible surplus.
- Pooling labour and machinery Two or more farms decide that instead of having their own machines they will form a new contracting business – usually a company or a limited liability partnership (LLP) – which owns its machines and carries out the field work across all the member’s holdings. The company is a third-party contractor for each of the parties who are members of the venture and over time the business may take on more land by adding partners or by tendering for a CFA on a nearby farm.
- There are many alternative business structures, and the most familiar is not necessarily the most suitable
- Some models allow semi-retirement – retaining assets but handing over some management responsibility without loss of tax status
- Check out the tax and legal implications of any option
- Trust between parties and understanding of each others’ objectives is key to making agreements work
- Ensure that, where required, the right level of farmer involvement continues
- Consider cross-compliance and other liability issues when planning
- Share farming Two farmers agree to work together to share the farming of an area of land. They remain independent businesses with, usually, the landowner providing land, buildings and fixed equipment, and the other farmer providing the machinery and the labour. Both parties share the risk and split the gross profits on an agreed percentage. Share farming is sometimes used to help a younger farmer build up a stake in a business.
Who do JVs suit?
- Farmers wanting to remain involved in farming but take a step back from the day-to-day work.
- People wanting to reduce their fixed costs by sharing the cost of labour and machinery.
- Farmers looking to bring new skills into their business and open opportunities for expansion.
- Investors who have bought land and want the tax advantages of farming it, but do not have the knowledge and skills to do it alone.
- New entrants looking for a foot on the ladder, but with less capital outlay than would be required to buy or rent a farm.
What is driving interest?
Traditionally there have been fewer JVs in the livestock sector than the arable sector, but Louis Fell of property consultants George F White’s Alnwick office says there has been a 30% increase in enquiries from livestock businesses over the past two years.
This is from farmers who want a different way of farming that protects their trading status and inheritance tax position.
It particularly appeals when a farmer starts to find the day-to-day physical work required with livestock farming too much, he says.
“It suits those guys who don’t want to give up or sell and don’t particularly want to give up the capital they hold in the breeding stock,” he says.
“Some landowners want a certain breed of sheep or cattle on the holding and they want the place kept nice and tidy.
“You can try to control these under a farm business tenancy [FBT], but you get much more control as part of a livestock contract farming agreement or JV.”
In arable areas such as East Anglia, the fall in commodity prices and rise in fixed costs, coupled with an ageing farming population, has led to a resurgence in interest in contract farming and other arable JV agreements, says Will Gemmill, head of farming at Strutt & Parker.
“Farmers are considering ways to continue with a profitable farming business, as well as perhaps reduce some of the stress or the aggravation of the day-to-day farming.
“Others are looking at ways of increasing their skills base by getting together like-minded people who have different abilities to make a better business from their combined forces.
“They are pooling labour and machinery resources and setting up a new company or limited liability partnership that contracts back to the parent businesses.”
Mr Gemmill says it tends to be the larger, more progressive businesses that are taking the latter approach, achieving savings of £35-£50/acre in fixed costs as a result.
What are the practical management challenges?
Joint ventures are more complex in the livestock sector than in arable, believes Mr Fell.
This is partly because of the administrative burden of record-keeping, passports, linked holdings and tagging requirements, but also because the landowner is likely to be on farm every day, walking around the stock and asking questions.
People need to be comfortable with the system in place to avoid potential conflict.
“I do believe that trust in livestock agreements is a much greater requirement than it is on the arable side. You have to have commonality on the structure and the process.
“Both parties have to have the same mindset about what they are trying to achieve.
“Are we finishing these animals or selling them as stores? Are we selling them live or dead? Are we selling breeding stock?”
Finding the right partner is also essential in arable farming situations, stresses Mr Gemmill.
“You’ve got to have like-minded farmers who want to get on and communicate well.
“If you have two people together who want to be the main decision maker, that can cause conflict.
“You have to be flexible and prepared to give up an element of control for the greater good. You can’t have decision-making by committee at harvest.”
What are the legal pitfalls of a JV?
When it comes to any joint venture, it’s crucial to think through all lines of liability and be clear in any agreement between members about who is doing what and who is responsible for what, says Julie Robinson, head of the agriculture team at solicitors Roythornes.
“You have to be very clear about what you are sharing and what you are putting in.
“The shareholders’ agreement also needs to cover insurance, liability for cross-compliance, mechanisms for deciding what gets done and when, and find a way to deal with disputes between members.”
In a scenario where people are sharing machinery, each member of the JV will have to make sure they individually comply with greening rules under the Basic Payment Scheme, including crop diversification, she says.
“JVs may seem like an obvious step when you look at the numbers, but it’s worth checking the knock-on effects of having your farm farmed by a third party [the shared contractor business].
“Who would be liable for a breach of your cross-compliance operations, for example?” she says.
“Greening rules can cut into the potential gains from joining forces with other farmers – the flexibility share farming offers may be worth considering on that score.”
From a legal perspective, CFAs are very simple as the farmer is only engaging the services of a contractor and not setting up a new business with them.
However, business structure does need to be considered when setting up another form of JV. Ms Robinson says most parties prefer to ringfence their liabilities so choose a company or limited liability partnership (LLP) model over a straight partnership.
Find out more
- The CLA handbook, A Practical Guide to Share Farming, covers the general principles, an explanation of the share farming agreement and financial and tax considerations. It is available to buy (for members and non-members) on 020 7235 0511. Alternatively, a free leaflet can
be downloaded at www.cla.org.uk/transfers/north/sharefarmingweb.pdf
- Templates for, and guidance notes on, different joint venture agreements are also available on request from AHDB Dairy by emailing firstname.lastname@example.org
“An LLP is a halfway house. It offers limited liability to its members, but they are taxed as individuals,” she says.
What about tax considerations?
Getting advice on the right structure for your individual circumstances is essential as there are some danger areas when it comes to tax and JVs.
An attraction of a CFA is that the farmer is still farming, as he or she is involved in decision-making and funding the crops.
This helps to protect the farmer’s status for agricultural property relief (APR) on the farmhouse and for income tax as well as for Basic Payment Scheme purposes.
Yet the question of how much you need to do to prove the farmer’s involvement is a grey area.
Gary Markham of Churchgate Accountants believes that farmers with a CFA may be putting their APR at risk, as well as other capital taxes.
“What’s often said is you only need quarterly meetings with the contractor, but I believe that’s not enough.
“The farmer needs to be walking the crops and making notes, even liaising with the agronomist a bit. That makes the position more robust.”
Mr Markham says farmers should also be wary of CFAs that drift towards an unofficial tenancy.
For example, it might be a red flag to HMRC if hardly any transactions are going through the farmer’s contract bank account (or No2 account as it is often known).
“In a scenario where the contractor is funding the variable costs, selling the grain on behalf of the farmer and then sending a bill in, is the farmer actually farming, because he is not funding the crop?”
When it comes to farmers sharing machinery through a JV, there will be instances where a company is the right structure.
But Mr Markham says his preference is usually to establish an LLP.
This is because if farmers use their annual investment allowance (AIA) to buy machinery, the tax relief is ring-fenced within the company and not available to shareholders to set against their own tax bills.
“In a partnership or LLP the tax relief is available back out to the members again.
“The last thing you want to do is lock up losses in a limited company. Many farmers when they have done that have been worse off financially.”
Farmers selling machinery or transferring it across into the new shared contracting business also need to watch that they don’t end up with a hefty tax bill, he warns.
If AIA was used against the purchase of the machinery initially then its tax value is nil, so a balancing charge is incurred if the machine is sold because the sale proceeds will be taxable.
“To transfer the machinery into an LLP involves selling it. But if you transfer it, the sale value, less its tax value, is taxable.
“However, there are provisions whereby if you have outside contracting income in your business, you can transfer the machinery at the tax written down value, without creating a profit on it, so long as the contract farming income goes with it.”