Smiths Gore is warning that the penalties that Her Majesty’s Revenue and Customs (HMRC) can impose on informal or poorly structured Contract Farming Agreements (CFAs) far outweigh the costs of setting up such agreements properly in the first place.

Ben Knight, a Smiths Gore Partner based in the firm’s Cirencester office, and a contract farming specialist, says that many landowners may consider that their CFAs are watertight when that will not actually be the case in the eyes of HMRC.

He says that the acid test is that the landowner carries the ultimate risk.  He says:

“In the event of a tenant failing he can lose everything but the landowner is not directly affected. But in a CFA the contractor is paid for services, the landowner gets a base return, and any loss from the enterprise can eat into that return.  Also, the landowner must be actively involved – to the point of, we recommend, at least quarterly meetings with records kept, forward planning and budgets, and a direct say in how the farming operation is managed.

“There are many instances where, for example, neighbouring farmers or landowners have set up what are loosely termed as CFAs, but they have little proper substance, and equally there are numerous cases where no records or paperwork exists.  It is these flimsy, insubstantial arrangements that can become unstuck.”

Potential taxation risks to the landowner may include loss of IHT reliefs, including agricultural property and business property reliefs, and re-coding and backdating of unpaid income tax plus interest that, depending on the length that an informal CFA has been running, could amount to a substantial sum.  In addition, under a revised CAP, it is increasingly likely that only active farmers will qualify for subsidies, with that definition applying across the board.

Ben Knight says:

“There may well be significant numbers of situations where informal CFAs have been entered into, none of which will be watertight, and all of which could result in an extremely unpleasant wake-up call from HMRC.”

Jim Drysdale, Partner, Anderson Strathern Solicitors, adds:

“The concept derives from the fact that the landowner is farming and in that context is facing risks, which are rewarded by a favourable tax regime. Thus the owner must be actively involved. HMRC are tightening up in all areas where tax reliefs are available.”