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HMRC internal manual

VAT Taxable Person Manual

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HM Revenue & Customs
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Particular trades: Share farming and the husbandry of crops: Share farming

Share farming is an increasingly common development, under which the landowner and contractor (share farmer) share the profits from the sale of a harvested crop.

When considering a share farming agreement, you need to decide whether this represents a coming together of equals, or whether it is more akin to one of the types of agreement explained at VTAXPER74200 or VTAXPER74300 This involves examining the general tone and flavour of the contract. The fact that two parties share the profits from the sale of a crop does not necessarily make them equals - for example, a landowner can engage a contractor to provide husbandry services and make payment for those services from the proceeds of the sale of the crop.

However, many share farming agreements do represent the coming together of equals in a joint venture. The essential features which convert a share farming agreement into a joint venture are:

  • the parties undertake to agree a farming policy and often have regular meetings to discuss it;
  • the agreement provides for a sharing of the profits and losses arising from the venture. This is usually achieved by the parties bearing agreed shares of the costs and sharing either the severed crops, or the proceeds of their sale, between them.

The Country Landowner’s Association has devised a model agreement, a copy of which is at VTAXPER74500. This model agreement incorporates the essential features of a joint venture as explained above, and is specific on two further points. Firstly, the share farmer does not have exclusive occupation of any part of the farm - and thus there can be no exempt supply under VATA 94 Sch9 Grp1. Secondly, the landowner and the share farmer are not in partnership - as evidenced by the fact that they submit independent income tax and VAT returns.

If your contract between landowner and share farmer is based upon this model agreement you should accept that it creates a joint venture.

Accounting consequences of share farming joint ventures

The distinctive feature of a share farming joint venture is that the venturers do not make any supplies to each other for which the profit share from the final sale of the crop is the consideration.

At the outset, each party brings something into the venture. Typically, the landowner brings his land, and the contractor brings his labour, machinery, and expertise. No money changes hands at this stage, and there are no VAT implications. Later, but prior to the harvesting of the crop, the parties may reimburse each other for costs which they have borne. For example, the contractor might reimburse the landowner for half of the costs of charges for utilities and machine maintenance; or the landowner might reimburse the contractor for half of the costs of seeds, sprays, fertilisers, and chemicals. These payments are consideration for supplies of services from one party to the other and follow the liability of the original supply.

When the crop is finally harvested, whoever owns that crop must account for any tax on its sale. Where the harvested crops are jointly owned, each party makes a supply of its agreed share and must account for tax on that value. If however, only one party owns the crop, that party should account for VAT on the whole amount. When a share of the proceeds of the sale is then passed on to the other party, that is outside the scope of VAT.

The share farming diagram gives a diagrammatic illustration of a typical share farming joint venture agreement and indicates the accounting consequences. Alternatively, you may find it easier to follow the following tabular version.

Tabular version of the share farming diagram

### THE LANDOWNER ### VAT position for landowner ### THE CONTRACTOR ### VAT position for contractor
       
A Provides land.      

B Maintains machines, hedges and ditches.

C Pays electricity charges.

D Pays water charges.

E Maintains insurance policies. Reclaims any input tax on these items. A Provides labour, machinery and supervision.
B Provides seeds, sprays, fertiliser and chemicals. Reclaims any input tax on these items.
  Charges 50% of costs of B, C, D and E.
  Declares output tax on B and C.

D = Zero-rated.

E= Exempt Reimburses 50% of cost of B, C, D and E.
  Reclaims input tax as appropriate.      
  Reimburses 50% of costs of B. Reclaims input tax. Charges 50% of costs of B. Charges output tax.
  Sells harvested crop. Declares output tax on whole sum if standard-rated.    
  Passed on 50% of proceeds. Outside the scope as a profit share. Receives 50% of sale proceeds. Outside the scope of VAT as a profit share.