Category: Policy & Business

Budget 2018

The Chancellor of the Exchequer, Philip Hammond, presented the 2018 Budget on the 29th October.  The timing was unusual, being both in the autumn and on a Monday (for the first time since 1962).  However, all of the traditional Budget features such as laboured jokes, selected use of favourable statistics and ‘surprise’ giveaways were still in evidence.  The main points as they affect farming are;

  • An increase in the Personal Allowance for Income Tax to £12,500 from April 2019 (fulfilling a manifesto pledge a year early).  The Higher Rate threshold will be £50,000 from next April.  Thresholds will stay the same for 2020 and then be indexed by the CPI.  All Income Tax rates remain unchanged for 2019.  These figures do not apply to Scotland which now sets its own tax rates – there will be a Scottish Budget in December.
  • Class 2 National Insurance contributions will be retained rather than abolished.
  • The Capital Gains Tax (CGT) allowance will increase from its current £11,700 p.a. to £12,000 from 6th April 2019.  To be eligible for CGT Entrepreneurs Relief assets will have to be held for two years rather than one as at present.
  • The lifetime limit for Pension Contributions will rise in line with inflation to £1,055,000
  • There are no obvious changes to the Inheritance Tax regime or that for Corporation Tax.
  • Despite pre-Budget indications, the turnover threshold at which businesses must register for VAT will remain at £85,000.
  • A new Structures and Buildings Allowance (SBA) is to be introduced for any commercial buildings where contracts are signed, or building commences, after 29th October 2019.  This applies to new (and improved) agricultural buildings.  The SBA will allow a deduction against profits at a fixed rate of 2% of the original build cost for a period of 50 years.
  • The Annual Investment Allowance (AIA) for plant and machinery will rise from £200,000 to £1m per year for the period 1st January 2019 to 31st December 2020.  The special rate for long-life assets will reduce from 8% to 6% from April 2019.
  • The National Living Wage (for those aged 25 years or older) will rise by 4.9% from £7.83 to £8.21 from April 2019.  National Minimum Wage rates (21 to 24 years) will rise 4.3% to £7.70.
  • For 2 years from April 2019 Business Rates will be cut by one third for retail properties with a rateable value below £51,000.
  • Further Government support to ensure that there is a ‘full fibre’ national Broadband network by 2033.
  • A Woodland Carbon Guarantee Scheme to support the planting of 10m trees by purchasing £50m of carbon credits.
  • The now-traditional freezing of Fuel Duties for a further year.
  • No increase in Duties on beer, cider or spirits (although rates for wine-drinkers will increase).
  • Various measures intended to boost housing and infrastructure with a particular focus on the Cambridge-Milton Keynes-Oxford ‘Arc’.

The Budget statement also, as usual, provided the latest economic forecasts from the Office of Budget Responsibility (OBR).  Economic growth in 2018 is now forecast to be 1.3% – downgraded from the 1.5% reported in March.  However the forecast for 2019 has improved from 1.3% in March to 1.6% now.  The figure for 2020 is 1.4%, but it should be noted that all of these forecasts are based on an orderly Brexit.

Scottish Agriculture Bill Amendments

The Scottish Cabinet Secretary for the Rural Economy, Fergus Ewing, has written to Michael Gove suggesting a number of amendments to the Agriculture Bill that is current passing through Parliament.  These include giving the devolved administrations statutory powers in policy areas such as Producer Organisations, WTO arrangements for agriculture, supply chain powers, Geographical Indicators and AHDB Levies.   For full details see – https://beta.gov.scot/publications/proposed-amendments-to-the-uk-agriculture-bill/

No Deal Brexit Preparations

NAO Report on No Deal Readiness

On 24th October, the National Audit Office (NAO) released its latest report on the UK’s preparations for a No Deal Brexit. Although the report’s scope examines the economy in general, the estimates provided indicate stark implications for the agri-food sector. Key findings include;

  • Between 145,000 and 250,000 traders would need to make customs declarations for the first time in the event of a no deal
  • HMRC estimates that it would have to deal with 260 million customs declarations per annum, as opposed to the current 55 million, nearly a five-fold increase.
  • 11 of 12 critical systems needing to be replaced or changed to manage the border were at risk of not being delivered on time and to acceptable quality. Several of these systems including the TRACES replacement system which would need to be developed by the UK to manage sanitary-related border movements are at major risk of not being delivered by Brexit day.
  • There is an elevated delivery risk due to the high interdependence between ‘at risk’ government programmes reliant on another ‘at risk’ programme. For example, seven of the most critical border systems are interdependent with the Customs Declaration Service (CDS) and/or its legacy system CHIEF (Customs Handling of Import and Export Freight); and all must be ready on day one for the border to operate as planned.
  • New infrastructure to track and physically examine goods cannot be built before March 2019. Without this, the UK will not be able to fully enforce compliance regimes at the border on day one. With approximately 100 working days until Brexit, this is unsurprising. 
  • Border Force intends to recruit 581 staff by March 2019 and expects to increase its staff in the months following. However, given uncertainty regarding the future regime, and the length of time it takes to recruit, security clear and train staff, Border Force acknowledges that there is a significant risk that it will not deploy all the staff it plans to recruit by 29 March 2019. The intended numbers of new recruits appears low in comparison with plans by Ireland and the Netherlands to each recruit approximately 1,000 extra customs staff in preparation for Brexit.
  • The most complex issues concerning the movement of goods at the border, such as arrangements to apply at the Northern Ireland and Ireland border as well as a system that will allow roll-on roll-off ferry ports and Eurotunnel to operate smoothly still need to be resolved.

As a result, the NAO warns that there will be an increased danger of criminals exploiting any perceived weaknesses or gaps in the enforcement regime. This could lead to an erosion of trust in UK agri-food produce. For example, if non-UK origin beef enters Britain illegally, at a lower price, and is then repackaged to give the impression that it is British beef (at a higher price), then regulatory authorities in both EU and non-EU countries will become very concerned. Given the substantial progress that the UK has made recently in opening markets such as China, a No Deal Brexit has the potential to undo a lot of this valuable work.

Further information on the NAO report is available via: https://www.nao.org.uk/wp-content/uploads/2018/10/The-UK-border-preparedness-for-EU-exit-Summary.pdf

No Deal Technical Notices

Separately, the UK Government has released several additional technical notices on preparations for a No Deal Brexit. Some notices were also published in August (see previous article) Several of the latest notices are directly related to agri-food and are briefly summarised below.

Farming and Food

  • Regulating Pesticides: the UK would establish an independent standalone PPP regime, with all decision making repatriated from the EU to the UK. This would help to ensure that a stable regulatory framework for pesticides is put in place from the point that the UK leaves the EU and would retain the two main directly applicable EU regulations in national law, through the provisions of the EU Withdrawal Act. This is intended to ensure that human and plant health standards continue to be upheld whilst making it as easy as possible for businesses to place products onto the UK market. Other points include;
    • All current active substance approvals, PPP authorisations and MRLs would remain valid in the UK upon departure in March 2019. Initially, there would be no policy changes, aside from technical amendments to make EU law applicable in a UK context. However, long-term the notice acknowledges that the UK could diverge from the EU in certain areas in due course. This point will be particularly relevant to decisions on glyphosate renewal for example.
    • After departure, all applications for products to be authorised in the UK would need to be considered via a national regime and applications for EU approvals would need to be made separately.
    • The Health and Safety Executive (HSE) would continue to operate as the national regulator. Applications under the national regime after Brexit would need to be made to HSE, in the same way as now.
    • Other processes carried out at an EU level including by the European Food Safety Authority (EFSA) would be converted into a national process and processed as part of a national regime if they were applicable to the UK. Decisions on MRL approvals currently undertaken at EU level would be replaced by a new UK statutory register in the form of an online database.
    • Importantly, to ensure that processes run smoothly, there would be an extension of three years to active substance approvals which are due to expire in the three years after the UK leaves the EU. Also applications being considered by the UK at the point of exit would continue to be progressed via a national regime.
    • Elements of the current regime, which rely on EU membership, would no longer be able to operate in a no deal scenario e.g. the arrangements whereby EU countries can choose to mutually recognise product approvals and also parallel trade permits. To address this, parallel trade permits in force at the point of exit would remain valid for a transitional period of two years after the date of exit, or the extant expiry date (whichever is sooner). After expiry, businesses would need to obtain authorisations for marketing and use of their products in the UK.
    • A transitional period for seeds which have been treated with PPPs authorised for that use in other EU countries would also be provided so that they could continue to be lawfully marketed at the point of departure from the EU and could continue to be placed on the UK market for a period of three years after Brexit.

Having a transition period of three years after Brexit is wise although some might question whether it is enough time to adapt, particularly given the timelines required to gain regulatory approval in some cases. Further information is available via; https://www.gov.uk/government/publications/regulating-pesticides-if-theres-no-brexit-deal/regulating-pesticides-if-theres-no-brexit-deal

  • Manufacturing and marketing fertilisers: again current domestic regulatory framework would remain in place but would be separate to the EU framework. There would be some implications for material labelled ‘EC fertiliser’ in accordance with the EU Regulation and sold in the UK:
    • There would be a suitable time-limited adjustment period during which ‘EC fertiliser’ could be placed on the UK market as now, to ensure continued supply. There would also be consultation with industry as to how long this time period needs to be so that UK or EU manufacturers would not have to change labels immediately. However, the Government envisages that it would be no more than two years.
    • There would be an option to use a new ‘UK fertiliser’ label for fertilisers placed on the UK market after Brexit, in accordance with the EU Regulation as converted into UK law
    • Upon the end of the time-limited adjustment period, fertilisers placed on the UK market would need to comply with the current domestic regime or with the requirements of the new ‘UK fertiliser’ regime.
    • The Government would also publish a new list of laboratories approved to test to the standards required for the new ‘UK fertiliser’ label.

The notice also claims that UK manufacturers would still be able to manufacture their products as ‘EC fertilisers’ in accordance with the EU framework and UK companies could still export ‘EC fertilisers’ to the EU. However, exports would have to ensure that they comply with applicable EU regulation, including the requirement that the manufacturer is established within the EU, and that any sampling required is undertaken by an EU-approved laboratory. The notice also claims that there would be no material change for users of fertilisers as long as fertilisers that are marketed meet the requirements set-out. Further information is available via:  https://www.gov.uk/government/publications/manufacturing-and-marketing-fertilisers-if-theres-no-brexit-deal/manufacturing-and-marketing-fertilisers-if-theres-no-brexit-deal

  • Plant variety rights and seed marketing: EU plant variety rights granted up to the point of departure, including those held by UK businesses, would continue to be recognised in the remaining 27 EU countries. Those rights would also automatically be recognised and given protection under UK legislation, without rights holders needing to take any action. For applications that have been applied for but not approved by March 2019, an application for rights in the UK would need to be made to APHA, following the normal process for UK plant variety rights, and using the same priority date and DUS tests. New applications from that date would require two separate applications (one for UK and another for EU-27). For protection of rights after departure, a separate application would need to be made to the APHA in addition to the EU equivalent.

For seeds and propagating material, varieties registered solely via UK National Listing would no longer be listed on the EU Common Catalogue and would not be marketable in the EU. To ensure that UK product could be marketed in the EU, breeders would have to ensure that the variety is listed on the EU Common Catalogue and the seed would have to be certified by an EU-approved certification body. Whilst the UK will apply to the EU to have its certification processes recognised as equivalent, this recognition cannot be guaranteed upon departure and may take 12 months to get approval. Further information is available via: https://www.gov.uk/government/publications/plant-variety-rights-and-marketing-of-seed-and-propagating-material-if-theres-no-brexit-deal/plant-variety-rights-and-marketing-of-seed-and-propagating-material-if-theres-no-brexit-deal

  • Breeding animals: upon departure, UK-recognised breed societies and operations involved in live animals and germinal products trade would no longer be recognised societies or operations in the EU and therefore would be ineligible to enter their pedigree breeding animals into an equivalent breeding book in the EU and would have no right to extend a breeding programme into the EU. However, the EU has stated that breeding bodies meeting its requirements will be permitted to make entries as a third country but that animals would need to be accompanied by a zootechnical certificate. Defra is making preparations to enable zootechnical stakeholders to be listed as approved third country breeding bodies with the EU Commission so that thereafter these bodies can issue zootechnical certificates. Arrangements for EU-registered breeding bodies operating in the UK would not change initially and would have access to the UK in the same way as they do now. For further information visit; https://www.gov.uk/government/publications/breeding-animals-if-theres-no-brexit-deal/breeding-animals-if-theres-no-brexit-deal 

There are also additional notices related to;

Whilst comment has not been made on all of the technical notices related to agri-food trade, the notices examined above, as well as the notices covered in August, reveal the eye-watering scale of the challenge facing UK Government and businesses if a No Deal Brexit comes to pass. In addition to the Government not being ready as reported by the NAO above, it is apparent that businesses are not prepared either. At a Brexit Select Committee hearing on 24th October, it was suggested that businesses have had more than two years to prepare for a potential No Deal and should have been doing more in terms of preparation. Given that the Government’s initial batch of technical No Deal notices were only published from August, comments such as this are unjustified. Businesses are facing three or more different scenarios by March. To adequately plan for a no deal would require large investments in many cases which would be wasted in the event that a deal was struck. Businesses should not be blamed for the situation that the country now finds itself in. The Government needs to continue its focus on achieving a smooth and orderly Brexit process and to avoid a No Deal scenario in March 2019. 

Brexit Negotiations

In recent days, it has been reported that the Brexit negotiations are entering their final phases with respect to the Withdrawal Agreement (Phase 1) and the accord is now at 90% or 95% completion, based on the views of Michel Barnier and Theresa May respectively. Whilst the October European Council passed without the discord witnessed in Salzburg, it is evident that the Irish border remains the crucial stumbling block, and that the success or failure of the negotiations, hinges on finding a satisfactory solution (or ‘fudge’) to this intractable issue.

For some, the Brexit talks are now entering their end-game. However, given that any Political Declaration will only have limited references to the future UK-EU relationship, the analogy of a football match about to enter into stoppage time of a first-leg European tie, might be more appropriate. That said, we do not know how long the stoppage time will last – the EU decided to refrain from announcing a special European Council in November as it thought that there was insufficient progress to merit such a move, and instead, it could be December before a Withdrawal Agreement is reached.

Although football analogies can be useful to explain the current situation at a high-level, they have their limits, particularly in terms of explaining the Irish border question (backstop). In recent weeks, Michel Barnier has sought to de-dramatize the backstop by suggesting that only agricultural and food products would need to be checked upon entry into Northern Ireland in a backstop scenario. These would in effect be an extension of the checks on live animals which already take place in Larne port for example, but the scale would have to be increased significantly. This of course is unacceptable to the DUP, and the UK Government by extension.

Instead, the PM is proposing a UK-wide backstop. This concept is uncomfortable for many Brexiteers as they perceive it as ceding control to the EU. They insist that any such arrangement needs to be time-limited. It also draws criticism from those in the EU-27/Brussels side who emphasise that they are only willing to extend special allowances to Northern Ireland, unless of course that the UK opts to remain in a Customs Union with the EU. What is clear is that the EU side requires a backstop “unless and until” an alternative arrangement is in place that obviates it as a means to maintain frictionless cross-border trade on the island of Ireland. There is also some openness to extending the transition (implementation) period in order to facilitate this, although whether this is by a few months or by a year or more remains to be seen.

There are also reports that the EU is ready to offer a UK-wide customs union arrangement with the EU as a way around the backstop issue. This would have to be outlined in a separate treaty to the Withdrawal Agreement which will continue to have a backstop, albeit with the language toned-down significantly. This move is seen by some as a significant compromise by the EU, which has made few concessions thus far in the negotiations. However, on its own, it is unlikely to satisfy the DUP and may require further commitments from the UK Government that the backstop will not be activated in the future. Furthermore, a customs union on its own may be insufficient to avoid regulatory checks (e.g. sanitary and phytosanitary inspections) on channel ports and would need to be accompanied by a regulatory equivalence agreement (Common Rulebook) to minimise these. 

Perhaps now is the time for those who advocate the use of technology to obviate the need for a backstop to come forward and develop workable solutions? There has been a lot of theoretical talk  about technology, but there is limited evidence that it is near being capable of providing practical solutions to help to address this issue. It is also worth remembering that the Government’s record with IT systems is poor as those who have been through the online BPS payments issues in recent years would attest. Whilst not ruling out technology’s role, it is clear that such technology needs to be tried, tested and trusted by both the UK and the EU before large-scale deployment. Even in that event, it is highly likely that the UK will have to maintain ongoing alignment with the EU in a manner that is akin to harmonisation (i.e. both the processes underpinning the product standards and the standards themselves will need to be recognised by the EU and the UK as being equivalent). Where things currently stand, it will be several years before technology is capable of addressing such border control issues. In the meantime, a transition (UK in a customs-union type arrangement) and/or backstop will continue to be required.

Across several agri-food supply chains, it is becoming increasingly apparent that if clarity is not provided on the Withdrawal Agreement and Political Declaration by December, decisions will start to be implemented which are likely to have negative implications for UK agri-food for many years to come. Already, key investment decisions are being deferred and businesses cannot continue to operate in an environment where there are three or more drastically different scenarios which could come to fruition in the next 5 months. The impasse is already affecting competitiveness and productivity. Agri-food businesses need to plan 2-3 years ahead, for most operations, and it would be helpful if some clarity could at least be provided until 2020/21. 

National Parks

Michael Gove and Julian Glover are inviting the public to have their say on the future of our National Parks and Areas of Outstanding Natural Beauty (AONB).  The ‘calls for evidence’ closes on 18th December 2018 and the responses will form part of the recently launched review (see May’s article https://abcbooks.co.uk/national-parks-review/ ).  The aim is to try and find out from those that live in and around National Parks and ANOBs how access can be improved, whether housing and transport in these protected landscapes could be made better.  In addition, what role these areas play in our cultural heritage and whether they can boost habitats for wildlife.  Further information and the online survey can be found at https://consult.defra.gov.uk/land-use/landscapes-review-call-for-evidence/

Welsh BPS Loan Scheme

As previously reported, Wales is making a nationally funded loan scheme available for those that do not receive their 2018 BPS when the payment window opens on 1st December.  This is an opt-in scheme and as claimants do not know whether they will receive their payment when the window opens, all are being urged to apply.  The application deadline is 30th November.

The scheme will see a loan, of up to 70% of a claimants estimated 2018 BPS, being paid in the event that the claimant’s payment has not been fully processed and paid on 1st December.  Loan payments are expected to be made during the week commencing 10th December.  Once a claim has been fully validated, the BPS will be paid less the loan that has already been received (balance payment).

The BPS loan can only be applied for via Rural Payments Wales (RPW) Online.  In 2017, only about 10% of claimants did not receive their payment on the first day of the payment window.  Unfortunately, those still with an outstanding 2017 BPS claim will not be able to receive a loan, neither will those going through Grant of Probate.  Only cross-border customers who are paid by RPW can make an application and they will be given a loan value of 70% based on their Welsh land only.

Review of Allocation of Farm Support 2020-2022

Michael Gove has announced a review of how agricultural funding should be distributed fairly between England, Scotland, Wales and Northern Ireland once the UK has left the EU.  An independent panel, chaired by Lord Bew of Donegore, will consider environmental, agricultural and socio-economic factors as well as farm numbers and farm sizes in making its recommendations.  The Government has already confirmed overall funding for UK farm support will be protected, in cash terms, until the end of this Parliament (expected to be 2022).  The review will recommend how this is distributed.  It is not, however, within the scope of the review to pre-empt decisions to be made on the agricultural funding arrangements beyond 2022.

Scotland has been the most vociferous around the distribution of agricultural support and Fergus Ewing has long argued that Scottish farmers are owed £160m through convergence payments made by the EU through the CAP, but the Government has said the review will not revisit the intra-UK allocation of 2014-2020 CAP funding and it will not redistribute money that has already been paid.

The review, which will be advisory, is expected to take about 3-6 months and will conclude before the 2019 Spending Review so that any recommendations can inform future funding decisions.

Small Grants Scheme

Defra has confirmed that the Countryside Productivity Small Grants Scheme will now open for a further round of applications in early 2019.  We had been led to believe there would be an application round in the autumn of 2018.  The scheme is targeted towards smaller investments in equipment which have been selected to improve the productivity of agricultural businesses.  Grants of between £3,000 and £12,000 were offered in the first round, available earlier in the year and applicants chose from a set list of equipment, meaning a quick and easy application process through a new online portal.  Following feedback, new items have been added to the list of available equipment, these include fruit ripeness spectrometers and nitrogen-measuring devices for calculating fertiliser application.  A similar application process is expected in this latest round.

According to Defra, it is on course to grant more than £15m to those that applied through the first round.  It has just announced that it has committed £30m for further rounds.   Defra originally said it was committing a total of £60m to the new scheme.

Agriculture Bill Progress

The Agriculture Bill received its second reading in the House of Commons on the 10th October.  MPs voted to approve the Bill by 286 to 227.  During the reading there was cross party support for the move away from direct payments to paying land managers for providing public goods.  MPs also argued that the Bill should recognise the importance of home grown food.  In addition Michael Gove confirmed that the Barnett formula would not be used when setting post Brexit agricultural payments for Scotland, Wales and Northern Ireland.

Following this reading, the Bill progresses into the Committee stage where detailed amendments will be tabled and voted on.  We will report if any of these look likely to materially change the scope of the legislation.  The Bill will also have to pass through the House of Lords.  The Government is hoping it will receive Royal Assent and become law early in 2019.  To accompany the Second reading the House of Commons Library produced a briefing paper on the Bill.  Although not providing anything new, this does provide a good summary of the proposed policy.  It can be found at – http://researchbriefings.files.parliament.uk/documents/CBP-8405/CBP-8405.pdf

 

 

 

Scottish BPS Payments

Scottish Rural Economy Secretary, Fergus Ewing, has announced that the first tranche of 2018 BPS loan payments are underway and should reach bank accounts over the coming days.  Mr Ewing has urged those that have yet to respond to their loan offer letter to do so as soon as possible.  Furthermore, those that have yet to receive an offer will do so as soon, as all eligibility checks have been carried out on their claim.  This should be no later than 31st October.  Once accepted, the loan payment should be received shortly afterwards.

Under the loan scheme, farmers and crofters receive up to 90% of their estimated 2018 BPS payment (including Greening) via a nationally-funded scheme.  Balance payments will be paid in spring 2019, once the Scottish IT system has fully validated all claims and can obtain EU funds.  The National scheme has been in place for the last couple of years as the payment system has not been able to validate claims in time for payments to be made in a timely manner.