With ever changing laws, and procedures and administrative headaches to deal with, the pressures faced by today’s agricultural, farming and rural community are immense.
At Myerson we have a team of experienced solicitors from a range of backgrounds and disciplines who are able to provide a wide range of legal services to the rural and farming community.
Offering clear, pragmatic legal advice, our newsletter brings you the latest news, updates, analysis and reports from the agricultural and rural sector.
In this issue:
- Grazing Agreements – The Difficulty of Horses
- Abolition of the Agricultural Wages Board
- Furnished holiday lettings – will you get Business Property Relief?
Grazing Agreements – The Difficulty of Horses
A common question we are asked is how best to deal with equine grazing arrangements and in what circumstances these ought to be drafted as a licence or as a lease.
It is common to deal with grazing arrangements by way of a licence (as this is often the cheapest and quickest way of documenting a short term, seasonal occupation of grazing land).
In addition, there are often tax planning considerations which result in the use of a licence rather than a tenancy arrangement.
Difficulties can arise however when dealing with the grazing of horses (and in particular, where grazing is part of a livery business or a riding school).
What are grazing agreements?
There are many different forms of grazing agreement, however these can be classified into the following broad categories:
- Grazing Licences – often short term, seasonal arrangements allowing temporary occupation but with no exclusive rights to occupy the land;
- A Common Law Tenancy – where there is exclusive occupation of the land by the tenant, but where such occupation is not for farming or business use (i.e. for purely private purposes);
- A Farm Business Tenancy (“FBT”) (or an Agricultural Holdings Act Tenancy) – a grazing tenancy where the use is purely grazing and where such grazing is part of a livery business or a riding schoo located somewhere else (off the let land);
- A commercial business tenancy – a tenancy where the grazing is incidental or secondary to a non-agricultural business use (i.e. a livery business or riding school).
If horses are grazed on the land (or housed in buildings on the land) and the keeper of the horse is not given exclusive rights to remain on the land then it is likely that the occupation will be deemed to be a licence and not a tenancy.
However a mere written intention to create a grazing licence is not sufficient. Even if an agreement labelled a ‘grazing licence’, this is no guarantee that the courts will accept that the arrangement is a licence and in fact, it could instead be held that the arrangement is a tenancy.
Even greater care must be taken where the occupation is for the purposes of grazing horses to ensure that the correct form of lease or licence is created. We set out the key tests below:
Land let for purely private purposes
If the land is not to be farmed or used in connection with a trade or business and is instead used for purely private use then it is likely that a Common Law Tenancy will arise where exclusive occupation is granted to the user, for a rent and for a term.
If it is a fixed term letting, the tenancy will expire automatically at the end of the fixed term of the lease. If not granted for a fixed term, then the appropriate notice must be given to terminate the tenancy.
Land used for grazing only (no buildings) and horses used in a trade or business
Grazing is an agricultural use. So, if the land is used only for the business of horse grazing (i.e. it has no buildings on it) and any associated business is run on unrelated land then it is likely that the tenancy will be an agricultural one.
If granted after 1st September 1995, it will most likely be a Farm Business Tenancy (“FBT”). If granted before 1st September 1995, then it will most likely be an Agricultural Holdings Act 1986 (“AHA”) tenancy.
Land with buildings, but the horses used in trade or business run on the property
If the horses on the land are used in association with an agricultural business run on the land (i.e. horses housed on the land for the purposes of farming, such a shire horses for ploughing), then it is likely that an agricultural lease will be created.
This however is likely to be very rare indeed and there are very few circumstances in which horses are still used on the land for a genuine agricultural use. Horses kept for stud purposes are not an agricultural use.
Where the horses are instead used in connection with a riding school or in connection with a livery business run on the land then this use will be deemend non-agricultural and the lease will become a business tenancy.
Such a classification could result in the tenant acquiring statutory rights to remain on the land at the end of the lease and even an ability to force the landlord to grant it a new lease (which could give rise to some unwelcome consequences).
As set out above, there are often a number of sensible reasons for using a grazing licence rather than a lease.
Care however needs to be taken when considering the type of grazing arrangement to ensure that where a lease is created, the nature (and implications) of the lease are fully understood.
Abolition of the Agricultural Wages Board and Wage
On 25 June 2013, the Agricultural Wages Board was abolished. The purpose of the Agricultural Wages Board was to set minimum wages and other terms and conditions for workers employed in agriculture in England and Wales.
The rationale for abolishing the Agricultural Wages Board was to bring agricultural workers within the remit of: (a) the National Minimum Wage Act 1998; and (b) the Working Time Regulations 1998.
From 1 October 2013, the default position for new workers employed in agriculture will be the statutory minimum provisions such as national minimum wage, 28 days’ holiday for full-time workers and statutory sick pay.
Any workers employed before 1 October 2013 will continue with the same terms and conditions which they currently have (provided that their terms and conditions comply with the National Minimum Wage Act and the Working Time Regulations).
Such terms and conditions may be more favourable than the default position and
could give rise to a two-tier workforce and the difficulties which this often presents. Some employers may choose to attempt to equalise terms across a workforce.
Employers should not vary fundamental terms of contracts without seeking agreement of the worker and perhaps carrying out a consultation procedure. Employers who fail to take these steps may risk a worker resigning and claiming constructive unfair dismissal, breach of contract and possibly unlawful deduction of wages.
National Minimum Wage (NMW)
On 1st October 2013, NMW increases came into effect, including:
- The adult rate (for workers aged 21 and over) increased to £6.31 an hour;
- The development rate (for workers aged between 18 and 20) increased to £5.03 an hour;
- The young workers rate (for workers aged under 18 but above the compulsory school age who are not apprentices) increased to £3.72 an hour; and
- The rate for apprentices increased to £2.68 an hour.
NMW is enforced by HM Revenue and Customs (HMRC). HMRC enforcement is initiated either by complaint from workers or third parties or as a result of a risk profiling or targeted enforcement of a particular low-paying sector.
Officers can carry out inspections at any time, without providing a reason, and can require employers to produce records and provide other information or access to determine entitlement to the NMW and the level of pay received by workers.
Where a compliance officer concludes that the NMW has not been paid, they may issue a notice of underpayment.
A notice of underpayment will be issued in all cases where it is found that arrears of the NMW were outstanding at the start of the investigation.
This will be done regardless of any explanation given by the employer (for example, if the underpayment was accidental) or where the employer has partly repaid the arrears by the time the notice is issued. No notice will be issued if the arrears have been fully repaid.
Notices of underpayment set out the arrears of NMW to be repaid by the employer together with a requirement for the employer to pay a financial penalty to the Secretary of State within 28 days of service.
The penalty is set at 50% of the total underpayment of the NMW; the minimum penalty is £100 and the maximum penalty is £5,000. If the employer complies with the notice within 14 days of its service, the financial penalty will be reduced by 50%.
In addition, workers can issue wages claims in the courts or Employment Tribunal to recover any non-payment of NMW.
As the Agricultural Wages Board has been abolished, workers employed in agriculture in England and Wales have protection under the National Minimum Wage Act 1998 and the Working Time Regulations 1998.
It is important that employers are aware of their obligations under these Acts and review their employment contracts/policies accordingly.
Furnished holiday lettings – will you get Business Property Relief?
The ages-old question for farmers is how to get the most profit from their land. In recent years, the answer for many farmers with surplus buildings has been to convert those buildings into small houses or flats which they then let to holidaymakers.
Although clearly this is not a farming activity, so that Agricultural Property Relief from Inheritance Tax (“IHT”) will not apply, in the past it has been hoped that Business Property Relief (“BPR”) would apply instead. Indeed, since BPR provides 100% relief from IHT it is a more useful relief than Agricultural Property Relief, which only covers agricultural value. The case of Pawson v HMRC first raised our hopes and then dashed them.
To qualify for BPR, there must be a “trading business”. Simply benefiting from investments will not count. Renting out land is treated as benefiting from investments; thus a furnished flat which is rented out long-term will not benefit from BPR.
Contrast this with a hotel; again, this is essentially the business of renting out accommodation but so many additional services are provided (breakfast, laundry) there is no doubt there is a trade. Furnished holiday lets fall into a grey area between these two extremes. It has long been known that the more services you provide, the better chance you have of qualifying for BPR. However, where is the line drawn?
Pawson v HMRC was not a farming case but it does illuminate these issues. Mrs Pawson had been a one-quarter owner of a large cottage which overlooked the Suffolk coast. The family used it for three weeks a year, but the rest of the time it was let out, usually for no more than two weeks at a time. When Mrs Pawson died, her executors claimed that her share of the cottage qualified for BPR but HMRC disagreed.
The services which were provided were:
- Cleaning in between visits;
- Heating and lighting;
- Telephone and television.
A small profit was made each year.
At the First Tier Tribunal (the first port of call after HMRC have made a decision), the Tribunal stated that so much effort was involved in letting out and looking after the property that the letting could not be said to be simply “holding an investment”. However, while this certainly appealed to common sense, the decision was against the run of recent cases. HMRC appealed to the Upper Tier Tribunal.
The Upper Tier Tribunal acknowledged that there is a “spectrum” of cases with a rental property at one end and a hotel at the other and that it will be a matter of fact in each case whether there can be said to be a “trading business”. They first decided that the Pawson case fell at the “rental property” end. There simply weren’t sufficient services divorced from the property itself to qualify as a trade. However, the judge then went on to say:
“I am unable to accept …that a holiday letting business is inherently of such a nature that it falls outside the scope of a “normal” property letting business…On the contrary, I consider such a business to be a typical example of a property letting business, albeit one of a fairly specialist nature…”
On this interpretation, even Travelodge should be worrying about qualifying for BPR.
There is still an argument to say that if the holiday lets are a part of a larger business, such as a petting farm or pony-trekking, then they may still qualify for BPR. The Balfour case of 2010 supports such an argument. In this case, a large part of the income of the Balfour estate came from holiday lettings and it was acknowledged that by themselves they did not qualify for BPR.
However, they formed part of a larger estate which had the usual mixed use of a Scottish landed estate – farming, forestry, shooting etc. It was held that the estate as a whole did qualify for BPR.
Therefore, if you have furnished holiday lets on your farm, you should try to ensure they form part of a wider holiday/leisure experience; in this way they may still qualify for Business Property Relief.