Contract farming agreements, along with other joint ventures, such as share farming and equity partnerships, have evolved as an alternative to letting land on a tenancy, avoiding commitment to succession rights that came with AHA tenancies in the 1970’s and 80’s.

Today, despite the introduction of the Farm Business Tenancy (FBT) in 1995 which changed the onus from lifetime and succession tenancies to short term agreements, many businesses are increasingly choosing contract farming agreements as an alternative.

We have focused on the popular contract farming agreement in this article, which can be applied in theory to any form of farming business. This is most commonly seen in the arable sector but is becoming increasingly popular in focused areas of the country for dairy enterprises.  

How does contract farming work?

This business relationship is that of a Farmer who takes on a Contractor to farm the holding according to an agreement drawn up by both parties. At no stage is a partnership or tenancy created as the land, crops, milk etc all belong to the Farmer at all times. This allows the Farmer to be seen to be actively involved in the trade of farming and seen to be taking financial risk, qualifying the agreement with HM Revenue and Customs (HMRC), whilst the Contractor has a business that provides a service to the Farmer.

The Farmer and Contractor run separate businesses and so keep their own set of accounts books, bank accounts and VAT registrations, thus ensuring that HMRC can clearly see the separate entities in action.

The farmer and contractor each receive regular payments from the farming business and at the end of the year share in any profits on a pre-agreed basis.

Benefits to the landowner

• reduction in daily work on the farm
• total separation from labour management and employment
• ability to use another’s expertise to turn around a loss-making enterprise
• free up family time
• receive regular income
• make a return on capital or release capital and reduce debts
• retain ownership and element of control over the farm
• reap the benefits associated with being the producer
• concentrate on other aspects of the farming business
• taxation planning

Benefits to the contractor

• grow net worth and business
• build equity
• maximise profits
• expand cheaply
• grow the team and help others to develop
• maintain the farm as if it were your own
• Keep staff motivated

The way forward

If you think that this is an interesting option for you, it is vital that you carefully consider the legal, financial and technical issues that need to be addressed, be you:

• a farmer looking to step down from the day-to-day business but retain an element of control;
• a land owner looking to take a more involved role in the management of your property;
• a contractor looking to expand your business; or
• a young farmer looking for a means of entry into the industry

For further information please contact your local office now for further information.

Chester     01244 40966

Knutsford  01565 757970

Stafford     01785 220044