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De-linked payments, the agricultural transition and planning for uncertainty

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In the absence of further clarity from Defra, land purchases and other transactions involving the restructuring of farm businesses will inevitably be dogged by uncertainty about the basis for de-linked payments. Our Head of Agriculture, Julie Robinson, takes a look.

From 2021, the start of the post-Brexit agricultural transition, the government plans to do away with payment entitlements and “de-link” direct payments from land and even from the requirement to be a farmer. The government’s reasoning is that this will simplify the current BPS scheme, help new entrants get into the sector and give farmers flexibility to plan their future. The relevant part of the Agriculture Bill itself is, however, widely drawn and mainly concerned with giving the Secretary of State the powers he needs to make changes to the current scheme. The government’s intentions are found in the bill’s explanatory notes and the accompanying policy statement issued by Defra.

Of course, the plans are all subject to “politics”, to further consultation and to what the detailed regulations say.

De-linked payments

The government’s policy statement envisages that farmers will receive the de-linked payment from 2021. The plan is for the right to the de-linked payment to be based on a farmer’s entitlement to basic payment scheme (including greening and young farmer) payments in a prior “reference period” or even based on entitlement to payment in a single year. The government has not said which years will be taken into account. Based on previous experience, we have to assume that the 2018 scheme year is not out of the running. Nor has the government said whether “entitlement to payment” will be determined by reference to BPS payment entitlements held.  

In short, and subject to the final regulations, someone will be entitled to receive a gradually reducing de-linked direct payment for the duration of the transition period (2021 – 2027) based on their previous right as a farmer, at some point, to payment under the BPS (and greening/young farmer schemes). At the end of the transition period (which may or may not be extended), no further direct payments will be made.

Implications for restructuring plans and transactions

Imagine a farmer is planning to buy land against which the seller has made a BPS and Greening payment claim in 2018. As part of the deal, the seller will transfer its payment entitlements to the expanding farmer, enabling them to make a claim against those entitlements and their new land in 2019 and 2020.  So far so good. But given the plans to remove entitlements from 2021 and make de-linked payments to former claimants based on their entitlement to payment in a previous period or year, there is a risk – if 2018 is the reference year or part of the reference period – that the de-linked payment will go to the seller and not the buyer.  

Farmers and their advisers may take a view that this is all so uncertain that there is little point either in delaying restructuring plans to keep current BPS claimant businesses ‘alive’ or in re-opening negotiations with prospective tenants or sellers. The latter might involve hammering out an additional agreement under which a seller or incoming tenant agrees to transfer to them any ‘right’ they (the seller or tenant) will have to a (reducing) de-linked payment for the limited duration of the agricultural transition. That assumes any such ‘right’ will be transferable; we simply do not know.

Similar considerations apply to plans that involve, for example, winding up farm businesses (current BPS claimants) between now and the publication of regulations. How can we ensure that any right to a de-linked payment that the closing business may have is available for its successor?

Unpicking late-stage 2018 deals, and catering for uncertainty in future deals, will inevitably incur additional transaction costs. It may also be that sellers and other parties will simply resist agreeing to transfer their potential rights to future payments, even if they are not planning to continue farming.  

Defra could help allay fears; it holds the cards. It could make an immediate announcement about the planned reference year or years, and could clarify whether “entitlement to payment” will be based on BPS payment entitlements held in that reference year or period. At least, then, businesses can make plans and do deals with a greater understanding of the impact on direct payments during the agricultural transition.

If you would like to discuss any of the farming sector issues raised in this blog, get in touch with Julie Robinson on 01480 587460 or at julierobinson@roythornes.co.uk.

 

 

 

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