Joint Ventures Project Report Feb 2011

JOINT VENTURE

PROJECT REPORT

Joint Ventures Project Report ______________________________________________________________________________________

2 DairyCo 30 September 2009

CONTENTS

Page

1. INTRODUCTION 1

2. FACTSHEET 1 EQUITY PARTNERSHIPS 2 4

3. FACTSHEET 2 SHAREMILKING 5 7

4. FACTSHEET 3 CONTRACT FARMING 8 9

5. JOINT VENTURE SUMMARY 10

6. TAXATION AND LEGAL STRUCTURES 11 17

7. CONCLUSION 18

Prepared for DairyCo by The Andersons Centre, September 2009. Based upon the Collaborative

Ventures work undertaken by Dairy Development Centre, Wales, and farming Connect under

European Union Objective 1 funding.

AHDB, operating through its DairyCo division, seeks to ensure that the information contained within this

document is accurate at the time of printing. No warranty is given in respect thereof and, to the

maximum extent permitted by law the Agriculture and Horticulture Development Board accepts no

liability for loss, damage or injury howsoever caused (including that caused by negligence) or suffered

directly or indirectly in relation to information and opinions contained in or omitted from this document.

Copyright, Agriculture and Horticulture Development Board 2010. All rights reserved. No part of this

publication may be reproduced in any material form (including by photocopy or storage in any medium

by electronic means) or any copy or adaptation stored, published or distributed (by physical, electronic

or other means) without the prior permission in writing of the Agriculture and Horticulture Development

Board, other than by reproduction in an unmodified form for the sole purpose of use as an information

resource when the Agriculture and Horticulture Development Board [OR (Sector Name)] is clearly

acknowledged as the source, or in accordance with the provisions of the Copyright, Designs and

Patents Act 1988. All rights reserved.



1. INTRODUCTION Joint ventures have become more popular over the last 20-30 years. Although the dairy industry

is still dominated by owner occupiers and tenants there are an increasing number of farmers

looking to evolve their businesses by adopting a joint venture business structure. The reasons for

the rise in popularity of the joint venture structure are many and varied; principally the decline in

young entrants to the industry has meant that farmers who do not wish to fully retire from

agriculture are looking to alternative methods to stay involved in agriculture without their

contribution being so physically demanding. Joint ventures offer a continuation of business

trading whilst also allowing a semi-retirement from daily activities. There are limited options for

farmers at this stage of their farming career to take, which give the same benefits as a joint

venture arrangement. In addition, joint ventures can provide a profitable combination of skills and

resources allowing all parties involved to grow in terms of business and wealth creation. It

essentially allows an alternative career pathway for managers, herdsmen, farmers sons or

daughters, waiting to establish a business in dairy farming. In many cases this would not be

economically feasible if the traditional route of trying to secure a farm business tenancy was

pursued, due to the high capital start up costs and often in respect of council tenancies the size of

holding is limiting.

Joint venture agreements offer the opportunity to maximise financial benefits to the business

(includes taxation benefits to the farm owner) whilst also presenting an opportunity in some cases

for expansion. The result is both an improvement in production efficiencies and an increase in

economies of scale e.g. reduction in costs and maximise output.

The purpose of this review is to provide a clear understanding of the range of joint venture

structures that exist and what each has to offer to existing farmers and new entrants to the dairy

industry.

There are three main structures for the establishment of a collaborative venture in dairy farming,

these are:

Equity Partnerships Sharemilking Contract Farming



2. EQUITY PARTNERSHIPS

What are they? Equity partnerships in agriculture are about bringing together farmers (people) to combine skills

and capital for the purpose of generating income and maximising the return on their capital

investment in the farm business. They can challenge the previous farming model of family farm

businesses and create new opportunities in the agricultural sector for those who are unable to

finance a farm business tenancy or farm ownership.

Who is suitable for an equity partnership? In the UK equity partnerships have evolved from the family partnership structure, to include

partnerships with separate non family businesses that share common objectives.

A landowner or tenant may enter into a partnership with a third party farmer or non-farmer (e.g.

herdsman).

The objective being to join together separate skill sets so that both parties profit from

improvements in technical and business performance whilst making more efficient use of capital

and in some cases grow the business.

Skills required

Farm management management of the production system, a proven track record in above average technical and business performance is required

Finance and accounting; financial budgets and feed budgets Strategic and operational management and planning Human resources (depends on farm size) A focussed, professional approach by both (all) partners is required in order to ensure

increased levels of profitability and annual growth in returns on capital investment.

A quality equity partnership should have:

A well drafted contractual agreement which covers all aspects of the business partnership

A clear business plan which includes the faming policy to be adopted, a capital expenditure budget, projections for production and realistic costs. A five year plan is the

minimum, which should show the forecasted rate of return for each partner.



An agreement in place that indicates how the financial surplus is to be shared by each party at the year end. The agreement should reflect capital shares held by each partner.

A communication plan between partners. This should include a monthly farm report and budget verses actual report circulated to both (all) partners.

The agreement should demonstrate a plan for the investment period An exit strategy for all partners should be detailed prior to commencing with the

partnership.

The business should be operated at an acceptable level of risk to all partners The roles and responsibilities of each equity partner need clearly defining from the outset

of the partnership.

All employed staff should have employment contracts and job descriptions A detailed procedure should be documented for resolving any disputes that may arise A statement of income and expenditure for the financial year should be furnished not

more than 4 months after the end of the financial year.

Strengths

The resulting equity partnership provides tax efficiencies for all parties. The partnership provides economy of scale. It allows involvement in a large farm

business that would otherwise be denied to a farm-worker/manager as capital would be

the limiting factor.

For the manager/farm worker who becomes the equity partner it is the first step towards the opportunity to farm in your own right e.g. it could lead to a farm business tenancy if

the equity in livestock increases each year.

The ability to share knowledge and experiences with others of differing skill sets adds motivation to the partnership.

Ability for the farm owner to reduce physical involvement with the farm and create time for involvement in other projects/businesses or just increase time spent with the family.

May allow the farm owner to achieve expansion without extra work.

Weaknesses

The responsibilities of each partner, if not clearly defined from the outset can make decision making bureaucratic and confusing

Disputes are more likely to be associated with budgeting so this needs to be agreed by both (all) parties

Changes in either business or personal objectives by one or both partners means that there are no longer synergies in the partnership causing a divergence from the agreed

plan

Poor business & technical performance means insufficient profit for the partners Lack of trust and respect between partners can result in business failure



Summary Each partnership will be different in its set up as capital available between partners and the size

of farm enterprise varies.

The partners must approach the venture with professionalism, fairness and transparency in order

for the venture to succeed.

A financially sound business, a shared vision, personal compatibility and good communication are

the keys to success of the partnership.



3. SHAREMILKING What is it? A share-farming agreement involves a tenant or farm owner (the landowner) entering into a joint

venture with another person (the share farmer). The sharefarmer may be a neighbouring farmer,

manager or herdsman. The sharefarmer operates the farm for an agreed share of the farm

income. It can allow a farm owner to discontinue milking cows whilst retaining a reasonable

income and return for his investment and time.

How does it operate?

A landowner or tenant provides the land and fixed equipment/milk quota.

The share farmer may bring labour (his/her own labour as well as hired in if necessary), machinery and expertise.

The livestock (dairy cows and replacements) may be solely or jointly owned by either business.

An agreement is made prior to commencement of the share-farming activity which determines the agreed ratio of returns based on the value of each persons contribution.

Direct costs are shared in the same way e.g. at the agreed ratio. This includes direct inputs such as feed, fertiliser, vet, water and electricity costs.

The financial surplus at the year end in is shared in the same proportion as the expenditure on direct inputs

The minimum term is usually three years but renewable at this point if the agreement has been successful

3.1 OVERSEAS EXPERIENCE

Share farming has been a traditional pathway to farm ownership in New Zealand and Australia for

many years. Agreements are regulated by the Share milking Agreements Act of 1937 and the

Share milking Agreements Order 2001 in New Zealand for variable order arrangements. The two

types of arrangement are Variable Order (or Low Order) sharemilker or 50:50sharemilker. A

50:50 share milker provides the management, the livestock, machinery and labour. In return he

receives a 50% share of the milk income and calf and cull income. The variable order share



milkers share can vary but is normally a calculated percentage of the annual milk receipts. The

2001 regulation stipulates that the Variable order share milker must receive 21% of milk receipts

(net of farm operating expenses) where the herd size is less than 300 cows. The farm owner

provides the land, stock and buildings and the sharemilker provides labour, small plant such as a

quad/motorbike, electricity costs and rubberware costs.

The sharemilker in both 50:50 and variable order agreements has to cover the cost of penalty

payments imposed by the Dairy Company due to a downgrade in milk quality for hygiene or cell

counts. A licence with the sharemilker is usually created rather than a leasing arrangement to

avoid complications over land tenure.

In the UK the Single Farm Payment and Environmental Scheme payments can add complexity to

agreements. The division of this income must be settled on prior to commencement of the

agreement. The share would be closer to 70:30 in favour of the share milker in the UK, to cover

the higher winter housing and feed costs compared to the NZ 50:50 share milker arrangements.

Strengths: Sharemilker

Can provide career progression to a farm tenancy or equity partnership for the sharemilker

Provides entry into the dairy industry with little or no capital Assets are transferable by the share milker if a larger farming opportunity presents

itself

Allows the sharemilker to develop man management skills Provides a return on capital invested; wealth creation by growing their equity in

livestock

Self motivation is enhanced because the sharemilker is working for themselves rather than being employed

Usually brings enthusiasm and a passion to succeed/work hard A shrinking skilled labour force in the UK Dairy industry means there is the

opportunity in the future for dedicated and professional young farmers to select the

best share milking business on offer.

Strengths: Farmer/Landowner

Provides tax efficiency for the land owner Allows the landowner to retire gradually from the business and take a step back from

day to day management

Increased profitability from economies of scale Technical expertise of the sharemilker brings improved returns Regulated by a formal contract



Each party operates their own business The farmer has no employment costs or commitment

Weaknesses

The length of any agreement may be limited if the share milker has the opportunity to move to a larger farm business but this can be defined

A variable profit margin means both farmer and sharemilker need to be top 10% operators in order to secure adequate returns for each party.

Availability of share milking opportunities are few in the UK as it is a relatively unknown structure in UK agriculture. This would also present difficulties for the sharemilker to

progress from a small share milking role to a larger scale opportunity.

Higher risks for the sharemilker as cow values can fluctuate which means they cannot be confident of making a profit if the cows have to be sold at the end of the agreement

Administration of the agreement can be complex Summary

The budgets for a share milking arrangement are farm specific and must reflect the ratio in which

both costs and returns are to be allocated on that particular holding as well as reflecting the

requirements of the milk contract e.g. spring or autumn block calving.

A share-milking contract offers the opportunity to encourage the next generation into the farm

business where in the past the capital required to start up would have been prohibitive.

The terms of the share milking agreement must be thoroughly discussed and agreed prior to

commencement of the joint venture in order to ensure both parties are protected and all

requirements are agreed.

There must be a structure in place to develop the management skills of the sharemilker.

Choosing the right partner for a share milking opportunity is critical to success.



4. CONTRACT FARMING What is it? Contract farming evolved in the 1970s and is principally an agreement between a farmer and a

contractor or another farmer. The contractor supplies labour, management and machinery and

the landowner provides land, buildings and milk quota.

The dairy herd can be owned by the farmer or the contractor. A cow hire agreement may be put in place to manage the livestock ownership.

The farming policy is decided and agreed by both parties prior to commencement of the agreement.

The contractor will receive a basic fee for the services provided which includes management, labour and power, plus a majority share of the financial surplus from the

venture. The financial incentive motivates the contractor to perform well.

The farmer retains a basic fee and receives a small share of the financial surplus.

The farmer provides a bank account dedicated to the business with the contractor only. From this the farmer pays the bills and receives the farm income. The contractor fee is

paid from this farm account

The farmer must be seen to be actively involved in the farm business to optimise tax relief available.

The agreement should clearly define the roles and responsibilities clearly for each party. Strengths - Farmer

Creates economies of scale Avoids employment liabilities The capital cost of machinery is realised so capital is available to employ in other

businesses and/or reduce debt

A formal contract provides regulation and guidelines Tax relief; provided farmer remains actively in business Good returns

Strengths - Contractor



Economy of scale Can provide for rapid expansion More than one agreement can be in operation at any one time Still receive a basic contractors fee even in a poor returns year

Weaknesses

Administration costs are higher than a straightforward Farm Business Tenancy Relies on both parties working well together Poorly established agreement can lead to early termination of a contract if the agreement

has insufficient returns to either party.

Summary Similar to other joint venture agreements, a successful contract farming agreement relies on a

well established agreement, good administration and good returns to both the contractor and the

farmer.

Good communication between parties is essential to success as is a mix of excellent technical

skills with equally excellent business expertise.

Joint Ventures Project _________________________________________________________________________________________________________________________________


5. JOINT VENTURE SUMMARY

Structure

Who?

Management Requirements

Reasons for Success

Equity Partnerships

Limited Liability

Partnership

Limited Company

Landowner or tenant

forms partnership with

another farmer, manager

or herdsperson

Monthly meetings incorporating: Financial reports Technical reports Human resources reporting (depends on size of business) Excellent communication skills

Partners with complimentary skills Increased profits & good returns to each partner Respect and trust between partners Agreement in place prior to commencement of business

Sharemilking Farmer and sharemilker trade

as separate entities

(sole trader).

Landowner or tenant

collaborates with

existing/new herdsperson

or manager

Dependent on the selection of a suitable sharemilker. May need investment in managerial & technical skills of sharemilker to secure success

Allows development from a low capital share to potentially 100% asset growth. Motivation of the sharemilker to succeed Good returns to the sharemilker and the farmer Administration of the agreement is good from the beginning

Contract Farming Farmer and contractor trade as

separate

businesses (sole

trader)

Landowner or tenant

forms collaboration with

contractor who in most

cases is another farmer

Monthly meetings

incorporating:

Financial reports

Technical reports

Excellent communication

skills

Clear & well structured agreement from the outset Communication is good between farmer and contractor Financial results are monitored and budgets updated Business growth and good returns to each person



6. TAXATION & LEGAL STRUCTURES

Before entering into a joint venture it is essential to determine the most suitable structure to

operate under for both taxation and legal purposes. This can be a complex process so the advice

of both an accountant and a solicitor with experience of joint venture trading must be sort.

6.1 LEGAL STRUCTURE

The most commonly used joint venture arrangement for farmers is a general partnership. It is

created under the Partnership Act 1890 which provides that it is an agreement entered into

between persons carrying on a business in common with a view of profit. Although the

Partnership Act 1890 sets out criteria for determining whether a partnership exists in a particular

case, it does not provide any further requirements and does not impose any rules on the parties.

The parties are free to agree their own terms in the arrangement (within the normal limits of the

law of contract).

Since the passing of the Limited Liability Partnerships Act 2000, it has become possible to use a

limited liability partnership.

A significant consequence of farming in a general partnership is the fact that the parties will

become jointly and severally liable for each others debts. Put simply this means that a creditor

could sue any member of the partnership for the whole of any debt incurred by any of the

partners in the course of that business.

Apart from liability, one of the most important issues to consider when entering into a farming

partnership is how to deal with the land itself. The law governing the occupation of land used for

farming is relatively complicated and if the landowner is to preserve the right to obtain vacant

possession of the land at the end of the partnership, this must be addressed very carefully. If the

partnership is a commercial arrangement, very often the partnership will be given a non-exclusive

licence to share occupation of the land with the landowner. In other circumstances, however, the

land may be made an asset of the partnership, although this may well have significant tax

implications. A third possibility is that the partnership is granted a farm business tenancy of the

land and pays a commercial rent to the landowner.

In the context of all farms, but dairy farms in particular, the occupation of the land is also

important in relation to milk quota and other subsidies. Milk quota is apportioned to land taking

account of the areas used by the producer for milk production. Other subsidies are also

dependent on the farming of appropriate areas of land. The relationship between the land owner



and the producer or farmer registered to hold quota or entitlements etc. and receive the relevant

subsidies must therefore be addressed specifically when the partnership is created.

It is possible to create a partnership and continue farming for many years without any form of

documentation. As soon as the arrangement fulfils the definition of a partnership in the

Partnership Act, a partnership is deemed to have been created. In view, however, of the

complications of modern farming and the risk that any final division of the assets may not reflect

the respective contributions of the parties, it is essential that a properly drawn partnership

agreement is prepared at the outset. This agreement can then deal with matters such as capital

contributions, share of profits, ownership and use of quotas and subsidies, occupation of the land,

termination of the partnership, division of assets etc.

6.2 TAXATION OF GENERAL PARTNERSHIPS

Where the farm business is run as a general partnership each partner must file an individual self

assessment return plus a partnership return which shows the profit or loss from trading. Each

partner is personally responsible for paying Class 4 national insurance contributions and tax due

on their share of the partnership profits. If partners are self employed they are expected to pay

their own national insurance contributions. Profits are shared according to the partnership

agreement.

6.3 LIMITED LIABILITY PARTNERSHIP (LLP)

A Limited Liability Partnership allows partners to limit their personal liability. Essentially the LLP

is run and taxed like a partnership, but partners are able to limit the level of their own personal

liability. This differs from a normal partnership arrangement where both partners are jointly and

severally liable for partnership debts. In an LLP the partners are also not responsible for the

actions of their partner. LLPs are incorporated and registered at Companies House, Cardiff and

each LLP must have a registered office. There is a charge applied for registration and

incorporation of the LLP.

The partners are taxed as individuals under schedule D (which means they are better off ) and

pay Class 2 national insurance contributions (self employed). Class 4 National Insurance

contributions are also payable should certain profit levels be achieved. This is at a rate of 8% of

taxable profits capped; an uncapped further liability of 1% may also need to be paid.

Profits are shared according to the agreed percentages. Each individual is then responsible for

paying income tax for the profits generated by completing the partnership form of the self



assessment return. The LLPs tax return shows the calculation of taxable profits and the

allocation between the partners of the LLP.

Each partners liability is restricted to the amount of their capital held in the business. Any capital

gains arising from the sale of assets from the LLP are treated as if held by the individual partners

of the LLP and they are therefore taxed on them separately.

Each year the accounts and an annual tax return must be filed with Companies House to keep

records up to date. This information is available to the public. Any changes to the membership of

the LLP must be notified to Companies House immediately. The name of the LLP must be clearly

identified to the place of business and on all correspondence sent out by the business.

HMRC (Her Majestys Revenue and Customs) must be notified of the formation of an LLP so that

the appropriate tax returns are completed each year.

Tax is due twice yearly as for a normal partnership (31st January and 31 July with the balancing

payment on 31st January after the previous tax year.)

6.4 LIMITED COMPANY

A farming business can also be run as a Limited Company although this structure is less common

in the UK agriculture. This usually has the structure of a private company limited by shares. A

private company cannot offer its shares for sale to the general public.

Shares would be held in the company by the participants to reflect each individuals stake in the

company. This will enable the shareholders rights to business profits via the payment of

dividends. Individuals can participate as both shareholders and directors of the company. The

directors can be employees of the company. The liability of the shareholders of the company is

limited to the effective value of the shares held.

A company pays tax on its profits and the companies directors are taxed on what they receive in

remuneration from the company. In a partnership arrangement, typical of many dairy farms each

partner is taxed on their share of the profit e.g. taxation has no bearing on how much or how little

they may have withdrawn from the business.

It is also possible for the director/shareholder to take a nominal salary in a limited company

structure and receive money as dividends.



A Limited Company must also be registered with Companies House in Cardiff and accounts must

be filed with Companies House each year. The registration of a new Company with Companies

House also bears a cost of 20.

Each company must file an annual return with Companies House within 28 days after the

anniversary of incorporation. The return should reflect the management structure (directors and

shareholders) and capital (if applicable) of the company.

HMRC must be notified of the Companies existence so they issue the correct tax return.

Company accounts must be provided for directors but also filed with Companies House no later

than nine months after the year end (April 6th 2008). An automatic penalty will be issued if the

accounts are not filed within the required time frame.

Corporation tax is due 9 months after the last day of the annual accounting period and is before

the deadline to file the company tax return which must be filed 12 months after the end of the

companys accounting period. The rate of corporation tax is 21% on profits below 300,000,

29.75% on the next 1,200,000 and 28% for companies with a profit of 1,500,000 or more.

Accountancy costs tend to be increased for limited companies and can be as much as one and a

half to two times more than normal sole trader or partnership accounts.

6.5 CONTRACT FARMING and SHAREMILKING

Legal Structure

Contract Farming Arrangements and Share Farming Agreements are joint ventures which are not

intended to create partnerships between the parties. Under a contract farming agreement a

farmer employs a third party either to carry out specific tasks for him, or to be responsible for a

part of his farming operations. In share farming arrangements the landowner and share farmer

cooperate over the farming, but maintain their own separate businesses.

Contract Farming Agreements

Contract Farming Agreements have become extremely popular over the past 20 years enabling

landowners to remain in business but delegate certain tasks or areas of responsibility to

contractors. The contractor is self employed and care must be taken to ensure that this status is

maintained and that he is not deemed for tax or other purposes to have become an employee.



The contractor is given access to the farm land to enable him to fulfil his duties but he will not

acquire any rights of occupation whatsoever.

The contractor will receive a contracting fee for his work which is payable whether or not there is

any profit from the farming of the land. Over and above this basic contracting fee, contractors are

often then given a share in the profits of the enterprise produced for the farmer.

In relation to milk quotas and Single Payment Scheme entitlements it is the farmer who will

generally hold and claim these subsidies and quotas.

As with partnerships, it is possible to appoint a contractor without reducing the terms of the

arrangement to writing. Without written terms there is always the potential, however, for

misunderstanding between the parties, particularly in relation to the sharing out of profits and

issues arising on termination of the arrangement. The very process of preparing a contracting

agreement will often focus the parties minds on the various issues which they need to agree at

the outset.

Share Farming Agreements

Share farming arrangements are, in structure, very close to partnerships. Although they are

distinct, that distinction can sometimes become blurred and there is always a danger that the

parties could find themselves farming in partnership, rather than under a share farming

agreement. With the joint and several liability of partners mentioned above this could result in

disastrous consequences.

Essentially for a share farming arrangement to exist the parties must each carry on their own

separate business so that expenditure and receipts from the joint venture are expenditure and

receipts of the respective separate businesses. There is no joint business set up between them.

The arrangement is simply one for the sharing of gross returns and not for the sharing of profits.

With this structure HM Revenue and Customs has accepted that for VAT and other tax purposes

there is no separate joint venture business requiring separate registration and tax returns.

Although each arrangement will vary, the landowner usually provides the use of the land and

buildings and often the inputs to the crops. The share farmer provides the labour and machinery

and possibly some of the inputs. The crops in the ground remain the property of the landowner

and the share farmer receives a share in the gross proceeds of sale of the crops. Although



sometimes seen in practice, it is advisable to ensure that the parties contribute separate inputs

rather than share in any expense in order to reduce the risk of the arrangement being deemed to

be a separate business and fulfilling the definition of a partnership.

As part of the arrangement the landowner will allow the share farmer access to his land but he

will not be granted rights of occupation. The position regarding quotas and single payment

scheme entitlements can be complicated depending on the respective assets and positions of the

parties. Under the Single Payment Scheme it is usually the landowner who will hold the

entitlements having been allocated them as occupier of the land, although this can vary according

to the situation. The share farming agreement should deal with the ownership and use of any

quotas and subsidies and especially should determine what should happen to them on

termination of the arrangement.

6.6 TAXATION

The structure of a contract farming or share milking activity must be such that the farmer can be

seen to be actively involved in the farming activity otherwise HMRC may take the view he is

simply accepting a rent and not involved in taking any risk. The farmer cannot have a guaranteed

return as no risk equals rent in the eyes of HMRC. A contract farming agreement must not in any

way reflect a tenancy or partnership otherwise taxation advantages cannot be claimed. Both the

farmer and the contractor each have their own business and keep separate accounts. The

farmer must take an active part in the trading of the business in order to qualify for the agreement

to satisfy HMRC that it is contract farming.

The continuing status of actively farming enables the ability to take advantage of capital gains tax

relief, inheritance tax relief and remain in schedule D banding for income tax purposes.

6.7 TAXATION BENEFITS OF REMAINING A FARMER

Capital Gains Tax: Relief

Capital gains tax is charged to individuals on the disposal of assets if they are sold for more than

the acquisition value. The current rate of charges is 18%. However, rollover relief can be

claimed as a deferral mechanism when the sale of business assets are made in order to

purchase other business assets. There is a re-investment period which is effective from one year

before the disposal of the existing asset to three years after is sold. If there is an excess from the



sale which is not rolled over into new assets than capital gains tax will be charged on the excess.

Clearly, this is a tax advantage worth securing in the formation of a joint venture.

Inheritance Tax Relief

In addition to capital gains tax relief inheritance tax relief can be secured as Agricultural Property

Relief (APR) and Business Property Relief (BPR). APR gives 100% relief from inheritance tax on

owner occupied farmland providing the transferor has owned the land for seven years or has

farmed the land for two years.

BPR

The sharemilker or contractor is normally self employed and must therefore keep their own set of

accounts for taxation purposes. It is important the contractor or sharemilker can demonstrate

trading income and expenses and not a single affiliation to one person or firm as this can be seen

as being employed by HMRC. Care must be taken in setting up agreements to ensure this does

not occur. Each party must show the necessary risk and reward from being involved in the

business to demonstrate to HMRC there is clarity of active farming activities for all parties

involved.

Herd Basis Taxation

Animals kept for production purposes rather than as trading stock can be set up on a herd basis

for taxation purposes. The herd is treated more like a capital asset and not included in trading

stock. This means the cost of maintaining the herd can be charged against tax and any profit on

its eventual disposal will be tax free. Any person involved in milk production can elect for herd

basis. The farmer must elect for herd basis within a two year period of the first accounting date.

However, if a new partner is brought into the business or the legal entity of the business changes

herd basis can be elected at this point.

Tax Averaging

LLPs, partnerships and sole traders can also benefit from tax relief by averaging profits if profits

made fluctuate widely over a two year period, e.g. by more than 30% of the higher of the two

figures of profit. The profit of the later year becomes the sum of the two profits divided by 2, thus

reducing the tax liability.



7. CONCLUSION Joint ventures present an opportunity for farmers, managers and new entrants to the dairy

industry to benefit from a mix of skills, capital and a commitment to successful dairy farming for

the future. The key element to any joint venture is the combination of the correct business

people. Each person involved should research the others background to be certain they want to

work together. A joint venture is a team effort where the team work with the best interests of the

business as the main focus. Those people that show an aptitude for continuous progression and

improvement in both management and technical skills are those best suited to a joint venture.

Each person involved must share common goals, although a change in personal goals should be

expected as people mature. Communication, trust and honesty between joint venture partners

are the most important elements to a successful joint venture.

All parties involved in a joint venture must be prepared to adapt to achieve what is right for the

business. Positive and progressive farmers e.g. of the can do attitude will be more likely to

succeed. There must however be a calculated level of financial risk for each party to avoid the

potential early failure of an agreement where working capital is limited. The future shortage of

skilled labour within the UK dairy industry is a threat that may encourage more owner occupiers

to look at joint venture partners. In many cases it would be beneficial to start a joint venture as a

sharemilker or contract farmer and progress to an equity partner to ensure a good working

relationship before both (all) parties commit capital to the venture.

Before entering into a joint venture professional advice should be sought from such people as a

farm accountant, solicitor, farm consultant, banker and also persons who have experience of

operating in a joint venture business. It may be necessary where there are more than two joint

venture partners to employ a chairperson to facilitate meetings in order for all parties to have their

say.

Joint ventures offer an alternative pathway for those involved in dairying to start or develop their

careers. For all those involved the set up, ongoing management and exit strategy must be

professionally executed to ensure the success of the venture.

Joint Ventures Project Report Feb 2011

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Transcript of Joint Ventures Project Report Feb 2011