The landowner and farming operator agree to split sales proceeds based on the values of their contribution to the venture. Advantages to the landowner include potential cost savings on employees, buying in bulk and full use of the farm assets.
Landowner provides:
- Land and buildings
- House
- Fixed equipment i.e grain storage
- Major property repairs
- Working capital – share of variable costs
Share farmer provides:
- Labour
- Machinery
- Management
- Working capital – share of variable costs
The two businesses are separate with their own VAT accounting and tax assessments, they must prepare their own sets of accounts and the owner must be active within the business.
The arrangement is not a partnership, otherwise the parties could potentially become liable for each other’s debt.
No tenancy is created provided the operator does not enjoy exclusive possession of any part of the land and buildings.
No accounts are produced. Both parties receive a proportion of output rather than being linked to a profit figure.
An example of share farming calculation is set out below:
The sales proceeds will be split based on the values that each party have contributed to the venture. In the example below, the land owner has contributed 49% of the costs and the share farmer has contributed 51%.
|
Total |
Land
Owner |
Share
Farmer |
|
| Section 1 | |||
| Land 500 acres at rental value £80 | 40,000 | 40,000 | |
| Buildings | 3,000 | 3,000 | |
| Fixed machinery maintenance | 1,500 | 1,500 | |
| Depreciation – machinery | 30,000 | 30,000 | |
| Machinery running costs | 15,000 | 15,000 | |
| Management | 5,000 | 2,000 | 3,000 |
| Office | 1,000 | 1,000 | |
| Insurance of standing crop | 1,500 | 1,500 | |
| ————— | ————— | ————– | |
| Totals | 97,000 | 48,000 | 49,000 |
| Percentage share | 100% | 49% | 51% |
|
Total |
Land
Owner |
Share
Farmer |
|
| Section 2 (based on section 1 percentages) | |||
| Variable costs | 98,000 | 48,020 | 49,980 |
| Crop drying costs | 3,000 | 1,470 | 1,530 |
| Insurance of crop in store | 1,500 | 735 | 765 |
| ———— | ———— | ————- | |
| Total costs | 102,500 | 50,225 | 52,275 |
|
Total |
Land
Owner |
Share
Farmer |
|
| Section 3 (based on section 1 percentages) | |||
| Crop sales and subsidies | 257,000 | 125,930 | 131,070 |
| ————– | ————– | ————– | |
| Surplus | 154,500 | 75,705 | 78,795 |
| ======= | ======== | ======== | |
The annual accounts for the land owner will only include a proportion of the gross margin and will exclude the items of the overheads paid for by the share farmer. In the above example, the land owner’s accounts will include income of £125,930 less variable costs of £48,020 resulting in a gross margin of £77,910. In addition, power and machinery costs and admin costs, which include the land owner’s proportion of the drying charges and insurance, will be deducted from the gross margin to arrive at the land owner’s profit for the year.
