Partnership agreements

Posted 18/05/2016

With the 16^th May deadline for this year’s farm subsidies claims having now passed, many will be sighing relief, and putting files away in farm offices. But some thought should still be given to the questions that may now be asked, especially about evidence of partnerships.

Although many farmers carry on in business together in partnership, all too often there is no written partnership agreement, or a very outdated one. Partnerships can come into existence by verbal or written agreements, or even be implied by conduct. In the everyday course of business, partners rely on tacit, fluid agreement. Flexible agreements between partners often reflect what happens on the ground, so it is sometimes recommended that certain elements of a partnership agreement are purposely kept flexible, but others must be properly documented to protect the business and ultimately the partners.

Flexibility can work well when all the partners get along, but it is a dangerous approach to adopt, chiefly because if there is no written agreement, the business is regulated by the rather archaic Partnership Act 1890; on partner’s exit it provides for a dissolution and forced sale of business assets. To avoid this risky scenario, a partnership agreement provides more sensible framework, preserving the business.

It is worth remembering that a partnership agreement will always take priority over any Will of a deceased partner. Partners may find that their beneficiaries are otherwise prevented from taking their intended inheritance by the partnership business. Care is needed to prevent problems.

Even where there is a written agreement, without specialist professional advice, succession planning may not be addressed sufficiently to best protect a landowner’s assets from inheritance tax, and so preserving the business. Succession planning and the passage of a farm to the next generation is understandably a sensitive subject for the younger generation to discuss with parents. Indeed, a recent Farmer’s Weekly survey found that almost ¾ of 61 young farmers didn’t have a succession plan in place. A number of well respected land agents acknowledge that succession planning is something that they rarely discuss with their clients.However, if succession isn’t planned, the passage of the business can become a tremendous burden for the younger generation to sort out.

As many farmers are increasingly aware, HMRC and the Rural Payments Agency are taking an ever more investigatory approach to partnerships, making it even more vital that farmers use their partnership arrangements to their own advantage.