Machinery collaboration saves pounds

Entering a machinery sharing arrangement is an option for businesses faced with machinery reinvestment where the acreage sometimes cannot justify the sums involved.

It often works best on farms already operating similar systems and cropping, but units with different cropping often benefit from sharing because seasonal demands optimise machinery use. And buying inputs through the joint venture, pooling crops and sharing gross margins is a further step which some take after a few years.

But the arrangement has to work on many levels, says Tom Gee of Brown & Co, Bury St Edmunds.

Personal

“First, can you build a good working relationship with the other party? Trust and confidence are crucial. If there are any niggles or concerns, they should be put on the table at the start – otherwise even small issues can become a real source of friction.

“Sharing the same farming philosophies and ethics as the other party is also important.

“You also have to think very carefully about how each person’s daily workload will be affected by such a restructuring. Areas of responsibility must be made clear.

Often there is a lead person and it can mean more work for him, especially at the start. For others it can free up time to devote to diversifications, other business interests or as a way of easing into retirement.

“You have to consider how a move like this will affect the longer term future of each business. For example, is there a next generation coming into the business, will there be room for them and what will be their role?

Financial

The potential to cut costs through sharing is clear, but achieving those savings has to be worked at and the temptation to kit up on the assumption that more acres will be picked up along the way must be avoided, warn advisers.

The savings are difficult to quantify, as every proposition for sharing will be different, but combinable crop farms can broadly expect to reduce labour and machinery costs by between £62 and £123/ha (£25 and £50/acre).

“It’s very important to get good accountancy advice. Borrowing requirements also have to be carefully and realistically assessed, especially for the initial investment.

sharing group

“A frequent concern is that businesses must merge, but this is not the case. Each farming business retains a separate identity, tax status and SFP claim.”

The capital funding and charges to each member of the joint venture for labour and machinery costs is on an acreage basis, reflecting the acreage shares of the member businesses.

“Where one puts in more machinery than the other, the one putting in less can make up his contribution in cash which may be used as working capital to fund the joint venture.

Practical

With the emphasis on cutting production costs, this type of arrangement can mean some have to spend more time on a tractor or on farm than they have been used to, points out Mr Gee.

“There can be some give and take but you have to have a plan for how things will work. Keeping timesheets for everyone is one way to do this, but directors and partners often do not like timesheets, so you have to make a realistic assessment of how much time everyone puts in and what that is worth.

“A common worry is that there may be disagreements over policy and priorities. For example, which crop gets cut first? The rotation can be set up to minimise such concerns and, where block cropping and gross-margin sharing are operated, this removes them.”

However, sharing gross margin is not for everyone and is usually only undertaken after at least a couple of successful years’ machinery sharing.

Farm labour is likely to be reduced by restructuring in this way, but redundancy is not always necessary. One or more workers may be due to retire in the short term, or a key person may have left one of the farms, prompting a review of staff and policy.

Another concern is how to resolve any differences between the parties if they cannot do this themselves. “An independent party can be agreed upon and asked to decide or advise in such an event.”

There should be a five- to eight-year plan for machinery reinvestment with some thought given to the likely methods of financing this, says Mr Gee.

“However, circumstances do change. For example, ill health could prompt a re-think. This type of joint venture is relatively easily unwound and liquidated but this could leave one or more parties in a difficult position, so the more thought and care that goes into setting up, the better.”

Legal and tax issues

The choice of form for the joint venture has both tax and legal implications. A limited company or limited liability partnership is the most popular, but a properly organised partnership can work in some cases. The advantages of a partnership include:

  •  Flexibility – for example, new partners can be introduced easily and there is no prescribed format for the operation of the agreement
  •  Ability to vary profit shares to minimise tax
  •  Relatively cheap to set up and easy to administer.

Many people are reluctant to use partnerships for joint ventures such as machinery sharing because they fear being liable for the financial actions of other partners.

“This is limited to the liability being incurred for the purposes of the business,” points out solicitor Graham Smith of Roythornes, who advised on the Wix Farms agreement (see case study) and favours straightforward partnerships.

A limited liability partnership or LLP is a separate legal entity and has some of the limited liability protection of a limited company, but is taxed like an ordinary partnership. It offers more flexibility than a company structure as to how it operates and is run, but is a relatively new business structure introduced in English law in 2001.

A company format offers limited liability and a current tax rate of 21%, but imposes reporting and accounting obligations including filing returns and accounts with Companies House which then become a public record.

Whichever form is used, a written agreement is vital, says Mr Smith. As well as setting out the practical and financial workings of the arrangement, agreements should also address what happens if the sharing venture doesn’t work, or where one party wishes to leave or retire.

Tenants must check their tenancy agreement for any restriction barring them from entering such arrangements. This is more likely to be included in more recently drafted tenancy terms.

SFP is retained and claimed separately by each party and is not part of the sharing agreement. Labour may be retained by the original employers or moved to the new joint venture business, transferring in with their accrued employment history and rights.

Careful tax planning is important, especially the timing of machinery disposals when creating the sharing arrangement, otherwise hefty tax liabilities can arise for the member business making the disposal.

“Disposals can severely restrict capital allowances or even completely extinguish allowances and will create a balancing charge which could effectively mean that the full sales value of the machinery becomes taxable in the member business,” warns Graham Page, a partner in accountancy firmEnsors of Bury St Edmunds.

“The acquisition of new machinery for the joint venture should, with careful planning, be eligible for the 100% Annual Investment Allowance on the first £50,000 of spend each year and for the 2009/10 tax year only, for 40% of new investment beyond that level.

“There are some pitfalls to consider in this area. Joint ventures need to be aware of restrictions on claiming allowances for machinery financed through HP but not brought into use by the end of the accounting year of purchase.

“With the current capital allowance regime it is common to be able to create a tax loss in the joint venture for the first year. It may be possible for these losses to be used by the member businesses against their own tax liabilities. Otherwise the tax losses are wasted in the first year and carried forward to use against future profits of the joint venture business.”

Case study

Wix Farms machinery share began in 2007 when two neighbouring businesses at Tendring Hundred in Essex shared a hired combine for a season. Both had ageing combines which needed replacing. These were sold, freeing up capital from the outset.

The combine share worked well, followed by co-operation on potato lifting the same year. The decision was then made to form a joint venture partnership to share all machinery for the 2008 harvest on Hempstalls Farm, run by father and son Jack and Johnnie Jiggens and on Spring Farm, run by brothers Peter and Tim Cooper.

Cropping and systems were similar on the 243ha (600 acre) and 210ha (520 acre) units. Both grew cereals, potatoes and rape although only Hempstalls originally grew onions. Both have also diversified into property lettings for storage and other uses.

Hempstalls Farm had recently lost a staff member to ill health and needed to reinvest heavily in machinery to continue growing roots. One option would have been to retreat to combinable crops only, but they had already invested in root crop stores. Another would have been to take on contract farming land to spread the investment over a larger acreage.

“What we’ve done is the cheaper option and less risky,” says Johnnie Jiggens. “This has enabled us both to invest quite heavily and while we’re not looking for more land at the moment, we could take on another 400 acres or so with the kit we have now.”

There are four working directors and two full time staff. These last two are Spring Farm employees but are hired to Wix Farms.

The arrangement delivered £20,000 savings for each business in the first year of full sharing despite the challenging start provided by last season’s weather. It has developed further this year, pooling crops and sharing gross margins. This simplifies administration and makes better use of farm storage, with all roots going to one farm and all grain to the other. Costs and output for the joint venture are split 56/44 to reflect acreages.

The two businesses had a combined fleet of 10 tractors before the merger; Wix Farms now runs six. They aim to have none older than 10 years, replacing one roughly every second year.

They have also invested in a new grader, de-stoner, trailers, 12m rolls and upgrading the potato harvester. Machinery is working harder but repair bills have not gone up pro rata.

“You have to get on well, be very like-minded and have similar aims. That the farms are so similar is a great help,” says Johnnie. “We have reduced labour from eight people plus harvest help to six including harvest help.

“Most of us have an area which we are responsible for, but help out wherever we are needed on the day. Peter concentrates on potatoes and spends a lot of time on marketing, which is paying off through better prices. Tim concentrates on cereals, including marketing. He also does the paperwork for the joint venture. I look after the onions and my father works between enterprises, wherever he is needed.”

Although the partners see each other almost daily, they meet formally every two months or so to plan the business.

The next big decision will be funding a new grain store on Spring Farm. The main issue is whether the host farm invests and lets storage to the other, or whether to share the cost of building the store.

Apart from rationalising investment and reducing costs, the arrangement has other benefits. Being part of a larger team working together is good for motivation. As well as improving quality and timeliness, running larger and more sophisticated kit is a morale booster for staff too.

Weekends and holidays are easier to organise from a larger pool of people to cover essential jobs such as irrigation.

Any joint venture will face a considerable first year administrative burden. Tim Cooper welcomes the move to pooling gross margins, which means that all invoices in and out no longer have to be split out according to acreage.

“It’s worked out very well,” he says. “It’s much more straightforward now. It might look as if we have too many chiefs, with four partners, but we all sit on tractors and we all do the practical work. Everyone knows what they need to do.”

Wix Farms machinery share

  • Set-up costs – roughly £1500 to £2000 per farm in additional accountancy fees and first year advice. One-off consultancy and legal fees of around £4000 per farm
  • Shared hired combine on two year agreement, hirers pay for fuel, insurance and wearing parts
  • Machinery: 7930 John Deere Stepless; 6930 John Deere Stepless; 6630 John Deere; 6610 John Deere on Berthoud 24m trailed; Case MXM 140 and Case MXU 125, general use
  • John Deere C670i combine, hired
  • Househam self-propelled sprayer
  • Grimme GZ1700 potato harvester
  • Grimme CS 150 de-stoner
  • Tong Peal hopper & grader
  • Five irrigators
  • Two forklifts, two industrial forklifts
  • 4m combination drill
  • 4m Accord tine drill
  • Sulky Reco fert spreader
  • Grimme GL 32B & Konings belt potato planters
  • Cropping
  • 560 acres winter wheat
  • 217 acres potatoes
  • 200 acres rape
  • 125 acres onions
  • 75 acres seed peas
  • 50 acres winter barley

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