Rural Law

Increasingly complex changes to the regulation of agricultural holdings in Scotland has left many landowners and farmers scratching their heads and wondering whether alternative farming structures are the answer.

Landowners looking to move away from inflexible agricultural leases are considering contract farming and share farming agreements. While the former is already well-established in Scotland and still growing, share farming is a newer approach that has proved popular in Australia and New Zealand.

So which one – if any – is the right structure for your business? Many factors apply, so it’s worth looking at key differences while considering the impact on control, income, tax and subsidy under each structure.

Contract Farming Agreements

  • A CFA involves a farmer or landowner engaging a contractor under an agreement for services, with the landowner remaining as the farmer in his own right. This enables the farmer to control the farm policy and have the contractor supply services to achieve the farm policy objectives.
  • Day-to-day operations are carried out by the contractor under the farmer’s control. Capital investment is supplied by the farmer, while the contractor normally supplies labour and machinery.
  • Under a true CFA, the financial return is not a guaranteed fixed income for the farmer. The financial return calculation will be set out in the CFA and is a matter of contract between parties. Generally, the contractor is entitled to a fixed payment and an agreed proportion of net profit.
  • The contractor will also be subject to any taxes incurred as a result of their contracting business. In terms of IHT and APR, the farmer should be able to claim 100% relief as occupier but the farmhouse itself may be at risk if it is not used in the business. The farmer will claim BPS entitlements and will be subject to all taxes incurred from trade.

Share Farming Agreements

  • SFAs involve two farmers operating separate businesses that can collaborate on an enterprise on the same land.
  • This may suit a farmer looking to retain management control and another who wants to progress, but lacks capital. Or it might suit two businesses that have different specialisations and skills and are more effective working together.
  • Under a SFA, both farmers operate separate farming businesses on the same land. The agreement will set out day-to-day responsibilities and expectations. In terms of income, neither party will have a guaranteed income and in a true SFA, parties will share gross revenue in whatever proportions are set out in the agreement. Each business will have its own separate cost base.
  • For tax purposes, each farmer will have their own tax liabilities for their business. Subsidy claims, however, are more complicated under share farming. Only one farmer will be able to claim BPS entitlements and the active farmer rules will need to be carefully considered to ensure compliance with the scheme rules.  Particular consideration should be given to cross-compliance conditions in a share farming operation given that more than one farmer is using the land. The BPS income sharing is a matter for negotiation between the parties.

There are important differences to each structure and the risks of getting it wrong can leave parties with a very different contract to what was intended, so it’s vital that legal advice is sought when considering either agreement.

If you want to know more I’ll be discussing contract farming and share farming at AgriScot in Edinburgh on Wednesday 21 November, at 2.15pm.

Register for free to attend .

Clive Phillips

Clive Phillips

Partner at Brodies LLP
Clive, Head of the Land & Rural Business team, has an in depth knowledge of the rural sector as a specialist in agricultural law and also having a family farm business as a landowner and tenant himself. He has particular experience with wind farm options, leases and joint venture arrangements.
Clive Phillips