As things stand, from 2021 direct payments are set to reduce by the following percentages.
Environmental Land Management Scheme (ELM)
This crisis has put an emphasis on the importance of our natural environment – it therefore fits that custodians of the land should be incentivised to protect, maintain and improve it. The proposals set out three tiers each with different objectives and not all tiers will be attractive to all farmers. The scheme will a have focus on outcomes specific to local needs. For larger schemes in specific areas, tenders may be required to secure the funding. Working with your advisers to form a strategic plan now, to identify where projects can be delivered to benefit the farm or estate’s natural environment for the long term will mean that you will be in pole position to secure funding and have a competitive edge in any bidding process.
Direct payment band
Reduction percentage
Up to £30,000
5%
£30,000 - £50,000
10%
£50,000 - £150,000
20%
£150,000 or more
25%
Farmers need to be alert to the reduction in income and consider the impact on cashflow and profitability.
The reforms propose, possibly from 2022, to delink direct payments from the land for all farmers. Payments will be made based on a reference period. This will mean that land and entitlements will not be required to secure the payment and the payment can be used as the farmer sees fit without restriction. Identifying strategies that can maximise opportunity within the framework of ELMs and seeking ways to innovate to unlock grants may enable some to replace the reduction in direct payments. An option under the transition period is to take a lump sum in lieu of future entitlement to direct payments. The basis of calculating that lump sum is to be confirmed, but this might be an appealing option to some. That lump sum could be invested or used to reduce debt for example, therefore reducing the burden of servicing debt on future profit without the subsidy payment. Careful consideration will be needed for the financial implications of taking a lump sum. The progress paper states that the tax treatment of lump sums and delinked payments will be considered in due course. Subsidy at the moment is taxable as part of the business profits – a lump sum may be subject to Capital Gains Tax but it will be a pleasant surprise if any lump sum or other form of delinked payment in the transition period is exempt from tax.
Supporting a prosperous and productive sector
The policy and progress update is clear that from 2021 funding schemes will be available to those farmers who wish to innovate and add value to their products, create new products or sell produce directly to their customers. As a commodity producer, farmers will be price takers on global markets but if a commodity can be processed to a food product and sold directly then the farmer is a price maker, often enjoying a premium for quality and provenance. The exhaustion of supermarket distribution capacity in the crisis has led consumers to look at smaller independent retailers and box deliveries. The situation with flour is a good example where it was not the availability of product that was the issue. The problem was the distribution channel not being able to cope with the demand from home bakers for smaller packs of flour since the industry was positioned to supply in bulk packs for the bakery and catering trade. Should a farm innovate then it could qualify for attractive tax reliefs available for research and development. These will help reduce the tax burden of the business and, following this crisis, it is inevitable that the tax burden of business will have to increase to reduce the debt that the Government have created in providing support during the crisis.
Looking forward
As we come through the immediate challenges of the COVID-19 crisis it is important that we reflect on how the crisis may change the way a business operates and how it will have changed consumer behaviour. It is more important than ever to take time to self-evaluate and devise a strategy for your farm and estate to maximise opportunity presented by policy reform and the new normal left in the wake of COVID-19. The progress paper comments on the role of the adviser and that for advice to be effective it must be “trusted, consistent, credible and cost effective”. At Scrutton Bland we have a specialist team of advisers to our farming clients. We place much emphasis on a collaborative approach with other trusted advisers to help our clients have the best chance of meeting the challenges but maximising the opportunities as policy reform unfolds and the world returns to a state of normal after the pandemic.
Payment reforms
At the nub of the reform is the known reduction to direct payments and it has been well reported how much of a farm business’ profit is represented by subsidy.
There are transitional arrangements for Countryside Stewardship Schemes to be replaced by ELMs.
Farm subsidy payments are to be phased out over a seven-year period from 2021 to 2027. It is not known if that timetable will change following the crisis. The Tenant Farmers Association has led calls for a “further period of reflection”.
To get in touch with a member of our agricultural team please email hello@scruttonbland.co.uk or call 0330 058 6559 .
A G R I C U L T U R E | S C R U T T O N B L A N D | 3
Made with FlippingBook Learn more on our blog