Agriculture Bill 2018 and financial impact of BPS removal
The long awaited Agriculture Bill was published on 11th September. It runs to some 57 pages, along with explanatory notes of about the same length and a press release summarising the provisions.
Further documents were issued the next day, detailing the financial impact of withdrawing direct payments, along with a summary of the responses to the “Health and Harmony” consultation issued in February.
The Bill is essentially a piece of enabling legislation, setting out broad powers for the Secretary of State to amend or introduce more detailed legislation by statutory instrument. It therefore contains relatively little detail on new legislation. However, viewed in the context of previous discussion documents and policy statements, many of which are clearly referenced in the Bill, it is possible to see quite distinctly where the legislation is heading.
The Bill is obviously intended to pull together a number of new initiatives which have appeared piecemeal over recent months. Primarily there is the major “Health and Harmony” consultation on the future of the industry which was published in February 2018 , and which set out a new framework for agricultural support post Brexit, moving away from flat rate subsidy payments and , instead, supporting environmentally friendly farming. The document also addressed concerns about animal and plant health, regulation and enforcement regimes and the impact of price volatility within the industry. All these points are addressed within the Bill, and the key objectives of rewarding the delivery of measures which would improve the quality of air, water and soil and improving public access to the countryside are clearly set out within the first clause.
In addition to the “Health and Harmony” consultation there have been a number of further pointers to future policy in recent months.
- In May DEFRA released a draft “clean air strategy” which suggested, amongst other things that arable farmers would need to take steps for reducing ammonia emissions.
- The 2018 detailed “Greening” rules for the main Basic Payment Scheme (BPS) brought in more relaxed greening requirements for hedgerows and field boundaries which suggested that a lighter and simpler regime was in prospect.
- A new and simplified 2018 Stewardship scheme was introduced to support specific environmentally friendly farming techniques with guaranteed acceptance (the previous scheme was subject to competitive funding).
- There was also an experimental “Small Farm Grants” scheme to support farmers in the purchase of certain prescribed types of capital equipment.
- Finally , on 12th July a very detailed discussion paper was issued on regulation and enforcement of new agricultural policy, suggesting a single regulatory authority, using multi skilled teams to enforce legislation in a more flexible and positive way, giving advice as part of the process and often keeping their strongest powers in reserve for use when preliminary measures fail.
All of these measures are referenced within the Bill, giving the government power to implement more widely the measures which have already been commenced, trialed or suggested.
The Bill also looks at some areas which had been raised in “Health and Harmony” but which had not hitherto been fleshed out by further pronouncements, many of which reflect the fact that former EU actions will now need to be undertaken by the UK government. These include:
- Powers to collect data from organisations within the food chain
- Powers to implement marketing standards
- Powers to authorise and recognise producer organisations
- Recognition that farmers are often in a weak position when dealing with their suppliers, and power to enforce “fair dealing” in this respect
- Power to intervene in agricultural markets and to provide financial assistance to affected farmers (where markets are abnormally disturbed)
- There are extensive clauses applying the Bill within Wales and Northern Ireland insofar as its provisions do not overlap with matters that remain the responsibility of those devolved governments
Finally, the Bill also looks to give statutory form to some measures which had previously been promised, and here the powers are specific.
- For 2019 and 2020 the amounts paid under BPS or a post Brexit replacement scheme will be very much the same as previously, although there is now a power to amend greening rules, including the “three crop” rule which many have found restrictive
- Between 2021 and 2027 there will be a seven year transition period during which flat rate support will be phased out. The phasing will be more rapid for larger holdings. There is a power to extend this period if required
- The transition payments will be “delinked” so that claimants will not need to continue farming to claim. There will be an option to take the delinked payments as a lump sum for eligible applicants, possibly where farming ceases. The quantum of the delinked payments will be based in some way on the previous BPS history, but it is not clear which BPS years will be considered
The impact assessment on the planned wthdrawal of Ditect Payments (DPs), makes depressing reading. It draws on a number of key statistics for the period 2014-5 to 2106-17 which will come as little surprise for practitioners:
- Direct payments comprised 9% of total farm revenue (21% for Less favoured areas)
- Average Farm Business Income (FBI), which roughly equates to accounting profit, was £37,000
- Direct payments comprised 61% of FBI (83% for tenants)
- In the Northeast DP was 98% of FBI
- 42% of farms would have made a loss before DP
- Loss making farms would need to reduce total costs by 10% to break even (plus whatever they need to live on)
The report makes a number of suggestions for ways in which farms can improve profitability as DP income is reduced. These include significant cost reductions, rent reductions, better breeding programs and diversification. It ignores the blindingly obvious fact that if there were a simple and feasible method for doubling profitability farmers would already be using it. Other logic flaws in the suggested ways forward include:
- Roughly half costs are fixed and half are variable. Since variable costs are output related and often beyond the farmer’s control, most of this reduction would need to come from fixed costs. Wages costs comprise a sixth of fixed cost, so effectively a 10% reduction in overall cost would involve a 25% reduction in property, machinery and general costs, just to break even. To secure a minimum wage for the proprietor the reduction would be nearer 50% - and this will apply to 42% of all farms, with a much higher proportion in some areas.
- Calculations within the report based on investment returns indicate that rent levels will halve in the absence of DP. These calculations ignore the practical factor that most tenants have a deep and multi-generational link to the holding and are unlikely to relinquish it willingly – not least because it includes the family home – so may well continue paying current rents until they are forced into bankruptcy. Conversely, other farms may look to expand their acreage to spread fixed costs, even if it means paying a rent in excess of the theoretical investment value.
- There is a limited market for diversification projects and some of the most common, such as holiday accommodation, may become less profitable if more farms move in that direction. Such projects also require significant capital investment and may not be possible for tenants.
- Most productivity improvements require investment. Hitherto this has been relatively easy to obtain, but if the withdrawal of DP reduces both profits and land values, banks may be less enthusiastic about lending to the sector, and any such lending is likely to come at a higher price.
The solution to the issue will probably be provided, at least in part, by the introduction of Environmental Land Management (ELM) systems which will deliver environmental benefits in return for payment. These are currently being trialed in at least two regions and ultimately it seems likely that most farms will be able to enter land into such systems. In the context of future profitability it would have been helpful if the report at least gave some indication of the income stream which an average system might give to an average farm. In the absence of such information, the paper is depressing but incomplete.
Unsurprisingly the Bill makes no mention at all of the tax consequences of any proposed changes. It is probably too early to foresee exactly what these might be, but a provisional analysis suggests that:
- The delinked payments are likely to be treated as income in the hands of the recipient. They will come within s 24 of FRS 102 and s 24.5E which states “A grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs shall be recognised in income in the period in which it becomes receivable”. According to the explanatory notes to the Bill, Clause 7, s (3) para c “makes it clear that delinked payments are a replacement for payments under BPS”.
- There may be an argument that where lump sum delinked payments are taken on ceasing to farm, they may take the nature of capital, but FRS 102 would suggest that, as currently envisaged, they will merely be a large income payment.
- Since the BPS scheme will come to an end in 2020 or 2021, it would appear that any purchased BPS entitlements will give rise to a constructive loss relief claim for Capital Gains Tax purposes.
- Since the delinked payments will, by definition, have no relationship to continuing agricultural activities, they may not be treated as earned income.
- For IHT purposes, the delinked payment stream may have a capital value, either as a standalone asset or as a guaranteed future income stream. As such the IHT position of the asset is unclear, but it seems that is some cases at least it will not attract BPR.
- There may also be an IHT consequence of putting land into long term environmental schemes. Land in certain specified (and obsolete) schemes is deemed to be eligible for APR under s 124c IHTA, but clearly the proposed new ELM schemes are not currently on that list. Given the magnitude of the tax implications, this may be a crucial consideration for those looking at such schemes.
These consequences may not have been exactly what the Treasury intended to flow from the Bill, so one would hope that the tax treatment will be clarified as the legislation proceeds through Parliament.
The Bill, summary press release and a detailed financial analysis of the impact of withdrawing subsidy support can be found at:
Farming & Rural Business Community, December 2018