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HMRC internal manual

Inheritance Tax Manual

Share farming and contract farming agreements: Contract farming

Contract farming is a far looser term which is applied to a variety of arrangements whereby a landowner farms land with contractors - perhaps better thought of as “farming with contractors”. He instructs them to provide services to his business which range from individual operations to more comprehensive packages of services. The farming business on the land is his business, the outputs from it are his and he accounts for tax on it.

The majority of contract farming agreements attempt to ensure that the landowner is the only principal occupier of the land and that the contractor does not obtain any rights of occupation as a tenant. The contractor merely has access as a licensee of the owner to fulfill his duties under the purposes of the contract for the owner. However, in some instances badly worded or operated agreements can fail to do this.

The contractor is usually entitled (under the agreement) to a fee for their work, reflecting the labour and machinery that might ordinarily be used. They may also receive additional sums based upon the financial outcome of the farm enterprises benefiting from the contract. But the enterprise management accounts on which that would be calculated would not be the farmer’s accounts for tax purposes. In practice, however the agreement is described, you will need to ascertain the precise terms of the agreement, as a starting point. . You should obtain copies of any written documents which provide evidence of those terms. You will also need to be sure that whatever was agreed between the parties and whatever appears in any written agreement accords with what was actually happening on the ground. In exceptional cases this might ultimately involve obtaining written evidence from all the parties involved.

While the existence of a Share or Contract Farming agreement is unlikely to affect the availability of agricultural relief on the farmland, it may have an impact upon any the relief available on the farmhouse. This is a question of fact and degree to be decided in each case and may involve consideration of aspects such as

  • the degree of financial risk for the deceased
  • the deceased’s involvement in the day to day agricultural activity including the regularity and scope of any meetings with the share / contract farmer
  • the deceased’s involvement in decisions relating to the selection of crops, sowing, harvesting, sales, and so on.

In the leading case of Arnander and others (executors of McKenna, deceased) v Revenue and Customs Commissioners SpC 565 [2006] STC (SCD) 800 it was decided that the day to day management and all acts of husbandry over the land were in that instance solely the responsibility of the contractors. Indeed, these powers and matters were expressly reserved to the contractor in the agreement documents.

Furthermore the deceased retained the services of a land agent who was responsible for the management of the land, the farming activities and all discussions with the contractors. It was the contractors who claimed the farming subsidies. The deceased himself had no correspondence with the contractors and evidence was produced of only one meeting between them. The Special Commissioner found that the deceased was not occupying his house for the purpose of agriculture.

These cases can be difficult to decide and if you are uncertain as to whether the extent of the deceased’s involvement in the agricultural activity of the farm was sufficient you should seek advice from Technical.