Agriculture Act 2020: Developments on delinking
With effect from 2024 DEFRA plan to delink Direct Payments from the land. It will affect all farmers in England. This means that recipients will no longer have to farm the land to receive the payments. In our previous article Agriculture Act 2020: Delinking the DEFRA way we explored some of the issues. DEFRA have now published their response to the consultation on this topic and we return to consider the impact that the rules are likely to have.
BPS payments will be replaced with delinked payments in 2024. BPS will end after the 2023 scheme year and delinked payments will be paid on an annual basis through to 2027. There will be progressive reductions in the delinked payments for the years 2025 to 2027 as the payments are phased out. Delinked payments will be taxed as income.
One of the main purposes of the consultation was to obtain feedback on the proposed reference years. The quantum of the delinked payments will be calculated by taking the average of the BPS payments made to applicants in relation to their entitlements in the reference years.
DEFRA have decided that the reference years will be the 2020 to 2022 scheme years, the explanation being that this provides a recent comparable for what the business is receiving. However, the fact that we are still in the last reference year will cause concern for many.
As lady day approaches, many businesses are already quite a long way down the track in terms of restructuring their businesses. If the size of the holding and number of entitlements is due to change from, for example, Lady Day this will be reflected in the reference years calculation. However, where more substantial restructuring is envisaged, perhaps with the start of a new farming business, or division of an existing one, consideration needs to be given as to the right time to complete those arrangements, whether that is before or after the 2022 BPS deadline, or indeed much later if time is available.
DEFRA have promised to publish guidance on the rules that will apply for mergers, splits and inheritance cases but they will be needed well in advance of the BPS deadline this year for parties to assess properly the impact that a change to a structure within the last reference year might have.
For example, where there is a division of an existing business into two separate smaller businesses, the business with the new SBI number will be claiming BPS for the first time in the 2022 scheme year. That business will only have one reference point (the 2022 scheme year) from which the delinked payment is calculated. This may also be the case if one business ceases altogether and a new one starts in this year, unless DEFRA provide exceptions for successor businesses.
There is also the question of the averaging of payments across the 3 reference years. If in one or more years 2020-2022, no claim for BPS is made, this might reduce the overall reference amount of future delinked payments.
2023 Scheme year
In order to receive delinked payments for 2024 to 2027 an applicant must claim and be eligible for BPS payments in the 2023 Scheme year. Thought needs to be given as to the identity of the business that will be able to make the claim next year and whether it is the same business that has a BPS claims history in 2020 to 2022 inclusive. This might create issues for example if a tenancy is due to end in March 2023 and the farming is taken back in hand. There is more time to consider this, but it is a point that should not be forgotten.
Effect from 2024 onwards
After the 2023 Scheme year, neither land nor entitlements will be needed in order to receive the delinked payments for 2024 to 2027. Entitlements will be abolished at that point, which for those businesses which purchased entitlements, may provide opportunities for showing a loss for capital gains tax purposes.
Applicants can cease farming altogether and still receive the payments. If the size of a holding increases or decreases after the 2023 BPS application is submitted, the amount of the payment will not be affected. If the land use changes, the amount of the payment will not change.
For businesses with an ongoing farming operation, the regime of cross compliance penalties will cease, although that does not stop any underlying statutory obligations from applying under each relevant statute – for example the nitrate vulnerable zone legislation will continue to apply, even though it will no longer be enforced through penalties under the Basic Payment Scheme.
Those businesses which are not in a hurry may choose to leave any restructuring until after May 2023 to avoid complications concerning the reference years and the identity of the applicant in 2023. However, delinked payments cannot be claimed when a retirement lump sum payment claim has been made so those looking to take advantage of the lump sum exit by restructuring before the deadline in 2024, will not be able to secure delinked payments in addition.
The transition period is a time of change within many businesses. Since delinking is not an "opt in" for English farmers, full details of the rules cannot come soon enough.