Consider carefully before splitting up
Many farmers have genuine
reasons for separating a
business. But great care is
needed to avoid losing IACS
payments. Robert Harris
finds out more
STRICT procedures are followed by IACS inspectors to identify whether a business is truly a stand-alone concern, or whether it has been created to maximise IACS payments.
To avoid problems, farmers must follow the guidelines if they are considering splitting a business, or face potentially disastrous consequences.
Some Scottish farmers were hit after EU auditors found the rules on separateness were not being applied correctly. Of the 1000 cases investigated, some 120 businesses were no longer considered separate. The estimated loss was £1m, over £8000 a business.
Businesses in other parts of the UK should take note, says William Neville, a partner with Bristol-based law firm Burges Salmon.
"There are still several instances each year where farms have to go to court to prove their businesses are separate. Potential six-figure sum losses are not unusual."
The ministry checks new businesses carefully to ensure they have not been established to avoid aid limits, he points out. But there are no hard and fast definitions.
"What constitutes a separate business? We would love to know," says Mr Neville. "The key aim must be to show clear distinctions between businesses, each of which must be credibly self-sufficient." Legal status, like partnership agreements or articles of association, although a starting point, are not enough to satisfy IACS inspectors.
"Anyone involved in separate businesses or looking to divide a single one up must ensure that the new arrangement ensures the parts are at arms length."
Paperwork is fairly simple to manage. "Ensure accounts, tax returns and farm plans are kept for each business on the farm to which they relate."
Buying and selling should also be kept as separate as possible. One way to overcome trouble is to form a buying group with other producers who have no connection with the business.
Similarly, machinery and labour must be treated as separate entities. Each farm should have the main equipment needed, though additional seasonal requirements are acceptable, says Mr Neville. Again, co-operation may prove a more viable alternative, so consider machinery rings, he adds.
If machinery, labour or any other service is shared, it should be invoiced at the going contractor rate. "Treat transactions as if you are dealing with a stranger. Anything more cosy is not keeping the businesses at arms length, and is courting disaster."
More complicated is proving where true ownership lies. Partnerships are particularly vulnerable. One partner may have a majority shareholding in both businesses, which can easily be overlooked, warns Mr Neville.
Problems also arise when a father hands a farm over to his son. "Too often, the father is unwilling to let go of the reins sufficiently. Unless his son is, in substance, taking over, it will not work."
The new farmer must demonstrate that he is capable of, and has complete control over, the farm, at least as far as day-to-day management is concerned. "Too often, the father is unwilling to let the son own and run the new farm. As far as IACS is concerned, that will always be an uphill struggle.
"Decision making cant be shared. For example, if the son wants to grow a particular variety, he has got to be able to do it. He has to have the freedom to buy fertiliser from, or sell corn to, anyone he wishes."
Care should be taken when the father eventually retires. If the son steps in to manage the main farm again, then the businesses will no longer be deemed to be separate. *
Businesses which have been split must stand up to IACS scrutiny.
• Ensure self-sufficiency.
• Legal status not enough.
• Paperwork _ separate accounts, tax returns and farm plans are needed.
• Separate buying and selling.
• Main machinery and labour needed on each farm.
• Beware partnerships.
• Invoice shared services at going contractor rate.
• Keep decision making separate.