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Written by John Turnbull, Chairman

A recent Scottish case has highlighted the dangers of taking shortcuts with Contract Farming Agreements (CFAs). Although Fyffe v Esslemont was about a Notice to Quit in a tenancy situation, it

has clear implications for taxation.

The facts were that a CFA had been put in place by the tenant of an agricultural holding, whose tenancy prohibited subletting. However the nature of the CFA was little more than a ‘swap’ of terminology, ie the payment was ‘rent’ in all but name and the Court decided the CFA was a sham and the tenant had “wholly or substantially abandoned the agricultural activity upon the farm”. In other words, his CFA was a badly drafted shortcut. Thus he lost his statutory protection and the Landlord’s Notice to Quit was upheld. The tenant lost his farm.

This case seems to underline the typical features of a true CFA which include:

  • A formal contract regulating the rights and responsibilities of the parties and how it is administered.
  • The contractor to provide the labour and equipment and be paid for it – on invoice when the work is done.
  • The contractor receiving a fee, which may include a profit sharing agreement.
  • The contractor may order inputs on behalf of the farmer although if this is the case then the farmer should pay for them, usually though a separate bank account, and the farmer should have a paper trail of the decision making process.
  • The farmer retaining risk with regard to his income – the farmer must be seen to accept business commercial risk.
  • A key factor in any CFA should also be that the farmer makes key management decisions. The mere letting or subletting of land is unlikely to involve any active trade, as indicated by the Fyffe case.

Will this prompt HMRC to review CFAs? It could, so the advice is make sure your CFA is properly and professionally created, and get advice from your land agent.

For advice on these matters please contact your local YoungsRPS office.

 

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