Contract Farming Flashcards
What are CFAs
Landowner (Farmer) engages the services of another farmer (Contractor) to manage farming operations under pre-arranged terms.
What is the principal
The contractor is delivering services to the Farmer and not operating on the farm on their own account.
The farmer therefore maintains Risk associated with the farm.
What are the benefits to the Farmer?
- Allows a farmer wishing to retire to maintain their farming status.
- Allows the farmer to release capital by selling their equipment.
- Can retain subsidies as he is still an active farmer.
- Taxation advantages
Benefits to the contractor?
- Economies of scale through farming additional land areas.
- Additional income
- Opportunities for new entrants without the need for large capital investments
What is the agreement structure?
Laid out in a legally binding contract outlining the following:
Term
- Typically 3-5 years
Responsibilities
- Clearly defined roles for both parties
- Maintenance, insurance and accounting
Financial Terms
- Contractors basic fee
- Depreciation payments
- Net return
- Remuneration for both parties.
What about Remuneration within the CFA
Contractors Basic Fee
- A fee paid to the contractor for carrying out the work required under the CFA
- Usually fixed per Ha or animal
Farmers Basic Return
- Financial return paid to the farmer in exchange for providing the fixtures (land, buildings).
Divisible Surplus
- The profit left over after costs is then split between the parties on an agreed percentage in the CFA. Usually weighed towards the contractor for the work they have done.
Example figures
Contractors Charge: £250/ha paid quarterly
Divisible Surplus: 70:30
What is the main tax advantage?
Inheritance Tax - Balfour Case
- The income derived is trading meaning the farm may qualify for Business Relief depending on the ratio of investment assets.
CFA Heads of Terms
Parties
Term
Responsibilities of both
Remuneration
Subsidy income
Insurance
Termination
Dispute resolution
