Agricultural update

The system of support for the farming industries of the member states of the European Union (EU) was devised by the six original members and the agricultural policy of the UK was integrated with this system after it joined the EU (then the European Economic Community) in 1973.

In 2003, a fundamental reform of the Common Agricultural Policy (CAP) introduced a new Single Payment Scheme (SPS) for direct subsidy payments to landowners and this was phased in throughout the EU member states from 2005 to 2013.
The UK was one of the first countries in Europe
to introduce SPS.

The new scheme was intended to change the way in which the EU supported its farming sector and included de-coupling subsidies from production; this allowed farmers to produce for market and consumer demands and reduced
the risk of the accumulation of food mountains. De-coupling was also designed to provide environmental benefits as the claimants of SPS also had to comply with environmental standards, food safety and animal health and welfare standards.

CAP is often challenged; should taxpayers’ money be handed to a single industry? Many may view it as a system where it is possible for some claimants to carry out little or no ‘traditional’ farming but still receive the payments. Under the SPS, it is sufficient for the land to be kept in ‘good agricultural and environmental condition’ and often ‘pony paddock’ claimants are criticised for applying for the payments under SPS each year.

With the end in sight for the original CAP Reform of 2003, the agreement for CAP Reform for the period 2014 to 2020 was approved by the EU Agriculture Council on 16 December 2013 and during 2014 the Regulations for the Basic Payment Scheme (BPS) has been issued.

Transfers of entitlements and land under
the current SPS must be submitted to the
Rural Payments Agency by 21 October 2014.
This gives approximately six weeks before the
end of SPS for the transfers to take place, ready for the automatic transfer to the new BPS at midnight on 31 December 2014. It is not yet clear when
the BPS will be open for transfers to take place.
This should be in January 2015, but the date is
yet to be confirmed.

Many current claimants believe that the SPS
will automatically change to BPS overnight on
31 December 2014; however, all claimants must register under the new system before 31 December in order for the automatic transfer to take place.

The SPS was based on the payment ‘entitlements’ held by the claimant. One entitlement could be owned and claimed per hectare of eligible land. Entitlements for BPS will be allocated by reference to the SPS entitlements held by the claimant on
31 December 2014.

BPS is comprised of 70 per cent of the subsidy available to the claimant and the remaining
30 per cent is paid following compliance with ‘greening’ measures.

Fundamental changes

There are a number of fundamental changes to SPS in the new BPS:

• Minimum claim area of five hectares. This requirement is viewed as the way to remove the ‘pony paddock’ claimants and it is estimated that this will reduce the number of claimants by 17,000.

• Active Farmer requirement. The full details of this are due in October 2014 and it is anticipated that there will be a minimum farming activity requirement; this may remove claimants such as airports, utilities companies and golf courses.

• Greening measures. These include crop diversification, ecological focus areas and maintenance of a national level of permanent pasture. Compliance with greening measures will provide 30 per cent of the payment under BPS. The greening requirements of crop diversification apply depending upon the size of the claim area. Three crops are required for over 30 hectares arable. Two crops are required for ten to 30 hectares arable; and there is no stipulation for crops under ten hectares. It has been agreed that claimants can receive the basic 70 per cent payment without claiming (and therefore complying with) the greening measures for the first two years of the scheme.

• Young Farmer Scheme. To encourage new entrants from the younger generation, a claimant who is under 40 years old and is a new entrant to farming in 2015, will receive an additional 25 per cent of the payment under BPS for a claim area of up to 90 hectares for a period of five years (if an eligible claimant started a farming business in 2014 and claimed SPS in 2014 then they can receive four years of ‘top up’ payment under BPS).

Greening measures

There are several points to consider on greening measures. Some claimants will view the ability to opt out of the greening measures for the first two years of the scheme as a reprieve. There will be farming businesses which cannot easily comply with the crop diversification rules when BPS commences.

The two-year period will give these farmers time to restructure their businesses, cropping schedules and supply contracts without having to factor in the financial loss of the majority of the payments.

The requirement for the maintenance of a set level of permanent pasture moves from farm level to a national level and the level will not be allowed to fall by more than 5 per cent.

If claimants are permitted to decide whether to decrease the extent of permanent pasture on their farm, it is not yet clear how the national level will be maintained; it has been suggested that it will be a case of ‘last out, first in’, i.e. if you are the last one to make the reduction which results in the national level falling too far, you will be expected to re-establish a set area of permanent pasture.

When the crop diversification element was announced, it appeared that many farmers would find it very difficult or even impossible to comply with the rules without considerable changes to their businesses. Fortunately, since the initial announcement, more and more crops have
been categorised as being different crops so
the requirement is becoming less onerous.

However, the rules will continue to have a significant impact on farmers who have contract agreements and therefore crop a large area of single crops. Claimants are being advised against swapping occupation of land with fellow claimants to achieve the crop diversification rules as the
Rural Payments Agency will be investigating such arrangements and there will be penalties imposed where there is deemed to be artificiality in the arrangement.

Specific considerations

Many property lawyers will believe that they will never need to consider such a specific agricultural area in transactions and that this will all be dealt with by agri-business advisers and land agents. However, the following must be considered when buying or selling rural land:

• Has the seller claimed SPS in 2014 and has their entitlement to claim been transferred to BPS?

• Has the seller complied with the BPS regulations including the greening measures and have any penalties been imposed on the seller which may affect the ability of the buyer to claim on this land in the future?

• Has the seller produced evidence that he is complying with the regulations during the current BPS claim year and will the sale contract include cross indemnities for potential losses due to penalties being imposed for the current claim year’s payment if the regulations have already been breached by seller or are breached by the buyer before the end of the claim year?

• Is the buyer eligible to claim BPS with sufficient claim area and meeting of the active farmer requirement?

• Timing of exchange and completion of the transaction. Will the owner of the land also be the registered claimant under BPS?

• Is the seller of the land also the seller of the BPS entitlements? This will affect the VAT position for the BPS Entitlements proportion of the sale price.

Furthermore, existing and new tenancies must also be reviewed with the following being considered:

• The return of the entitlements to the landlord (if required by the lease) at the end of the term. Does the lease deal with the potential for changes in the subsidy system during the term? Also the lease may terminate during the period after 21 October 2014 until transfers commence again under BPS and there may be a delay in returning the entitlements to the landlord.

• The landlord or a new incoming tenant will want to ensure that it can comply with the BPS regulations and will need to be able to check the existing tenant has the relevant greening measures in place and that the crop diversification rules have been complied with during the current year of the scheme. The landlord may require indemnities from the outgoing tenant.

If you are dealing with the sale, purchase or lease of agricultural land, advice must be taken from the clients’ agri-business advisors and agricultural lawyers to ensure that the current SPS or future BPS elements of the sale are included in the sale contract. SJ

 

Alex Robinson is a partner at Lodders