Category: Policy & Business

Spending Review

The Chancellor, Rishi Sunak, delivered the Comprehensive Spending Review (CSR) on the 25th November.  Originally, this was meant to set out the budgets for Government departments for the next three years.  However, the economic uncertainty generated by the Covid-19 outbreak has seen the budgeting period reduced to just one year.

The general economic news is grim.  The economy is set to shrink by 11.3% this year (2020-21) – this is the largest fall for 300 years.  A recovery is then forecast with 5.5% growth in 2021-22 and 6.6% the following year.  Unemployment is forecast to increase from 1.62 million (4.4%) currently to 2.6 (7.5%) million by the middle of 2021.  It will then decline.  In terms of public finances the UK is forecast to borrow £394bn this year – a peacetime record.  For some context, the maximum borrowed in the wake of the Financial Crisis was around £150bn, and the average in recent years has been below £50bn.  Whilst this money has been raised at low interest rates, the books will have to be balanced at some point – indicating future tax rises.  The Chancellor gave no real indication in the CSR what these might look like – putting-off such decisions until the planned Spring Budget, by which time the Covid situation may be more stable.

Below is a list of some specific points from the CSR with relevance to farm businesses and rural areas more generally.  (However, as the CSR runs to 122 pages we may have missed one or two relevant issues);

  • Defra’s ‘settlement’ will ‘ensure total farm support in England of £2.4 billion in 2021-22 to meet the government’s commitment to maintain the current annual budget to farmers in every year of this Parliament’.
  • Under the Barnett formula, this should mean that farm support funding has also been maintained at current levels in Scotland, Wales and Northern Ireland.  However, a row has broken out with the devolved administrations claiming that their funding has actually been cut.  It is claimed that the Treasury has used a ‘flawed methodology’ that bases the payments on a single year when some funds went unspent.  Also, inter-Pillar transfers have not been properly accounted for and amounts have been ‘netted-off’.  In total Farm Ministers in Wales, Scotland and Northern Ireland believe that they will lose almost £400m of funding between 2021 and 2025.
  • Defra’s capital budget will increase by £0.6 billion in cash terms next year, taking the total to £5.8 billion.  There will be additional investment in flood prevention and science capability.
  • The CSR outlines a lot of new infrastructure spending.  This will affect many landowners in specific locations where new roads etc. are being planned.  There is a new National Infrastructure Strategy (NIS) – see https://www.gov.uk/government/publications/national-infrastructure-strategy.  Also, there will be a New Infrastructure Bank to catalyse private investment in infrastructure projects across the UK
  • There will be a £4bn ‘Levelling-up Fund’ in England for local infrastructure (e.g. town bypasses).  Amounts for Scotland Wales and NI through the Barnett formula.
  • Digital infrastructure will also receive extra funding including Shared Rural Network for 4G coverage, and better rural Broadband connections
  • More details of the Shared Prosperity Fund were announced which is set to replace EU funding (including Rural Development funding).  This will be £1.5bn per year but looks unlikely to be available until 2022; pilots will take place in the meantime.  More details are promised in the spring but it is headlined as supporting ‘ex-industrial areas, deprived towns and rural and coastal communities’.  The focus seems to be more on training than on business grants.  Given this, and the focus on other areas aside from rural ones, the level of ‘diversification grants’ looks set to be much lower than it was under Rural Development programmes.
  • The National Living Wage (NLW) will rise by 2.2% from £8.72 to £8.91 per hour from April 2021.  It will also now apply to those 23 and above.  Other Minimum Wage rates will also increase.
  • Income Tax Personal Allowance and Higher Rate Thresholds for 2021-22 will be increased in line with the September CPI figure.  This figure will also be used for setting National Insurance thresholds
  • The Business Rate multiplier will be frozen for 2021-22.

UK Trade Continuity Agreements

Good progress continues to be made on the UK finalising continuity agreements to replicate the trade deals that it was party to as an EU Member State.  To date, such deals have been put in place covering 53 countries and, importantly, on 21st November, a rollover agreement was reached with Canada.

This agreement essentially replicates the provisions of the EU-Canada ‘CETA’ agreement, including specific tariff rate quotas (TRQs) for various agri-food commodities (e.g. imports of Canadian beef).  However, detail is awaited on the apportionment of these TRQs between the EU27 and the UK as the legal text has not been published yet.  One slight negative from the UK perspective is that it loses access to CETA’s cheese TRQ (14,750 tonnes for the EU (incl. UK)).  However, it can continue to compete for the WTO TRQ (14,272 tonnes) that the EU has access to when exporting to Canada, for another three years.

It is also anticipated that this continuity agreement will form a prelude to a more bespoke UK-Canada deal which will begin to be negotiated in 2021.  Although the deal only enables the UK to maintain the status quo with Canada, it is seen as a success for the UK, particularly as there were concerns earlier in the year that a rollover might not be concluded.  Getting these rollover agreements has been a major effort for UK trade negotiators.  Some agreements remain outstanding, most notably with Turkey, Egypt and Mexico, but discussions with these countries and 11 others are ongoing.

10-Point Green Plan

The Prime Minister has set out a ten-point plan for a ‘green industrial revolution’ which aims to create and support up to 250,000 British jobs.  The Green Plan, which is intended to set the UK on the road to net zero emissions by 2050, whilst levelling-up the economy and creating jobs, covers clean energy, transport, nature and innovative technologies.  A summary of the 10 points is set out below:

  • Offshore wind: Producing enough offshore wind to power every home and supporting up to 60,000 jobs.
  • Hydrogen: Working with industry aiming to generate 5GW of low carbon hydrogen production capacity by 2030 for industry, transport, power and homes, and aiming to develop the first town heated entirely by hydrogen by the end of the decade.
  • Nuclear: Advancing nuclear as a clean energy source, across large scale nuclear and developing the next generation of small and advanced reactors, which could support 10,000 jobs.
  • Electric vehicles: Backing car manufacturers to accelerate the transition to electric vehicles, and transforming our national infrastructure to better support electric vehicles.  This includes the headline point of banning the sale of petrol and diesel-only cars by 2030.
  • Public transport, cycling and walking: Making cycling and walking more attractive ways to travel and investing in zero-emission public transport of the future.
  • Jet zero and greener maritime: Supporting difficult-to-decarbonise industries to become greener through research projects for zero-emission planes and ships.
  • Homes and public buildings: Making our homes, schools and hospitals greener, warmer and more energy efficient, whilst creating 50,000 jobs by 2030, and a target to install 600,000 heat pumps every year by 2028.
  • Carbon capture: Becoming a world-leader in technology to capture and store harmful emissions away from the atmosphere, with a target to remove 10m tonnes of carbon dioxide by 2030.
  • Nature: Protecting and restoring our natural environment, planting 30,000 hectares of trees every year, whilst creating and retaining thousands of jobs.
  • Innovation and finance: Developing the cutting-edge technologies needed to reach these new energy ambitions and make the City of London the global centre of green finance.

Whilst full of ambition, critics point out that the plan is being backed with only £4bn of new money which will be insufficient to achieve many of its aims.  This contrasts with £27bn being earmarked for new roadbuilding schemes.  The full announcement can be found via https://www.gov.uk/government/news/pm-outlines-his-ten-point-plan-for-a-green-industrial-revolution-for-250000-jobs

Brexit Update

As has seemed to be the case for several months now, the Brexit negotiations are at a crucial stage and, although the EU side believes that 95% of the text for the trade deal has been agreed, three stubborn sticking points remain.  These are the so-called level playing field provisions, State Aid and fisheries.  Given that several deadlines have now passed and the Transition Period will end on 31st December, time is now the biggest threat.

Addressing The Remaining Issues

Of the three outstanding issues, the level playing field is deemed to be the most problematic.  On one side, the EU is adamant that the integrity of its Single Market and its competitive position must be protected.  It wants an agreed set of baseline environmental, climate change and labour protection standards to be agreed between the UK and the EU, which would evolve over time.  The EU is pushing for the right to swift retaliatory action if the UK seeks to diverge from these.  The UK, on the other hand, is resisting such moves as it sees its sovereign right to diverge as one of the key gains from Brexit.  The UK also wants as much flexibility as possible on these issues to have greater leverage in agreeing trade deals with other countries from 2021.  This is particularly the case for agri-food.  Food standards were once closely linked to the level playing field requirements, but they tend not to be mentioned recently – a tacit acknowledgement by the EU that the UK could diverge in this area in future.  However, that will come at a price in terms of Single Market access for UK agri-food producers.

Well-connected sources believe that if the level playing field issues can be overcome, that will be the key to unblocking the impasse.  This because progress has been made on State Aid recently and areas such as aviation, energy, road haulage and rules of origin have not been finalised only becuase they are linked to the level playing field issue.  That would leave fisheries, which is likely to come down to a last minute trade-off at a political level involving the Prime Minister, the President of the EU Commission and EU Member State leaders, most notably Emmanuel Macron.

Time Constraints

Although there are signs that both sides are inching towards a deal, it increasingly looks like whatever will be agreed between the UK and the EU will be a bare-bones agreement.  As previous articles have noted, this should mean zero-tariff and zero-quota free trade in agri-food goods but non-tariff measures (NTMs) will be significant.  Taking beef and sheep meat for instance, this would mean physical check rates of 15% at border control posts. To date, the default check rates for such products has been 20% (i.e. for countries trading with the EU on a Most-Favoured Nation (MFN) basis).

On 24th November, the French Customs Authorities tested their customs and Border Control Post facilities in Calais and it caused severe queues in Kent.  This indicates that in the first weeks and months of 2021, there will be significant delays at the border.  Concerningly, the UK authorities have not yet begun testing their arrangements, because in many cases the infrastructure and systems are not in place yet!  The fact that the French are testing indicates that they are close to being ready.  There is unease that from January the delays on the UK side will be even more substantial.  All of this gives rise to the prospect of significant value deterioration on UK agri-food exports to the EU as time delays erode shelf-life.  It could also mean the loss of high-value export sales, particularly in the retailing sector.

On the imports’ side, the UK is phasing in the introduction of its Border Controls over six months in 2021.  This should help imports of highly perishable agri-food products (with the exception of some high-risk categories) from the EU.  However, added friction is going to become a fact of life from 2021 and supply-chains are going to have to adapt sooner or later.

Time will also be an issue in terms of ratifying any trade deal, particularly on the EU side as it normally requires a vote at the European Parliament.  The last session of the European Parliament is currently scheduled for 14th December, however, there have been suggestions that MEPs have been advised to keep the 28th December available. Another option being mooted by the EU is to “provisionally apply” any UK-EU trade deal from 1st January with the ratification process at EU Parliament and potentially at Member State level (if the deal includes areas solely within the remit of each Member State).  Either way, the EU Council scheduled for 10th-11th December will be crucial and it is thought that a deal will need to have been agreed by that point and the process of translating the deal into legal text and other EU languages will need to be well underway.

If a trade agreement can be reached between the UK and the EU, any initial agreement can be improved over time as is the case with trade deals elsewhere.  That said, the prospect of a No Trade Deal remains significant.  If a Deal is reached, there are many technical issues, including transit arrangements in the UK and Ireland, which have not had any time devoted to them, and will need to be ironed out from January.  Although it is inevitable that elements of a phasing-in period will need to be implemented by both sides (e.g. Belgian customs authorities have acknowledged that some of its customs requirements will be relaxed initially), businesses need to brace themselves for significant change from January.

Agricultural Transition Consultation

As previously written, the Defra consultation on the detailed workings of the Agricultural Transition was expected ‘in November’.  Indeed, Theresa Villiers, the Defra Farming Minister, wrote in the Farmers Guardian in mid-November that the consultation would be out ‘later in the month’.  However, at the time of writing (26th November) nothing had appeared.  It seems highly likely that this will be released early next week.  it may now be more of an ‘announcement’ covering aspects of the Agricultural Transition and ELM, with some of the consultation aspects dropped.  We encourage readers to keep an eye on our website where we will publish details and analysis of the proposals if and when they appear.

Welsh BPS in 2021

Crop diversification looks set to be abolished in Wales and the other ‘Greening’ requirements moved to the Cross Compliance regulations from 2021.   The Welsh Government has published its response to the consultation on changes to the current CAP regulations until the new Sustainable Land Management scheme is introduced.  Titled ‘Sustainable Farming and Our Land: Proposals to Continue and Simplify Agricultural Support for Farmers and the Rural Economy’, the changes will apply to the new domestic BPS and Rural Development Programme, which will commence in the next scheme year (2021).  The full document can be found at https://gov.wales/sites/default/files/consultations/2020-11/sustainable-farming-summary-of-responses.pdf .  A summary of some of the key outcomes include:

  • Removing the Crop Diversification rules under Greening.  The EFA requirements and Permanent Pasture retention rules will no longer be part of Greening, but they will be retained under the Cross Compliance regulations.  The Ecological Focus Areas most often declared (hedgerows and stonewalls) will continue to be protected through unchanged Cross Compliance.  However, a new condition will be added to GAEC 7 to protect Environmentally Sensitive Permanent Grassland, to ensure it cannot be ploughed or converted without the consent of Natural Resources Wales.  There will be no loss of support, as the Greening element (worth approximately 30% of total payment) will be subsumed into the BPS.
  • Reallocating any unused National Ceiling annually to the BPS.
  • Simplifying cross-border claims, so that the Welsh payment can be made in isolation of the English claim.  Provision will however be made to ensure farmers with land in other parts of the UK can continue to rely on land declared in another UK administration in the calculation of the 5 hectare minimum claim size for BPS for the claim year 2021 onwards.
  • The proposal was to close the Young Farmers Scheme to new entrants from 2021.  But strong opposition to this from respondents has resulted in no changes being made to the BPS Young Farmer Scheme, which will continue to accept applications from 2021. The Welsh Government has however said the scheme will be included in any review undertaken to transition from BPS to the new agricultural support schemes.
  • Allowing supporting documents to be submitted up to 31st December in the relevant claim year.  The application deadline and late claim penalties will remain unchanged.
  • Whilst the majority of responses supported the extension of the National Reserve categories to include those who have purchased new land or committed to a lease of 5 years or more since 2015, the responses also indicated there was no consensus as to how the new category should be delivered.  The Welsh Ministers have therefore decided that no new categories will be added to National Reserve for 2021.   The 2-year usage rule, which requires entitlements to be activated at least once in any two year period will continue to apply in Wales, and be used to replenish the National Reserve.
  • Reducing the inspection rate so that 3% of scheme claimants are inspected.
  • Simplifying the over-declaration penalty rules by removing the current ‘yellow card’ legislation.
  • Introducing advance and balance payments, so that 70% will automatically be paid in October following basic checks and a balance payment during the payment window once full validation checks have been completed.  The payment window will remain 1st December to 3oth June.
  • Removing the ‘Negative List’ which means operators of railways, waterworks, real estate services or sports and recreational grounds will be deemed eligible to apply for BPS, however, minimum levels of agricultural activity will be retained as currently apply.
  • The proposal to make the growing of hemp not eligible for BPS has been rescinded after responses to the consultation suggested there is sufficient potential for hemp to be grown throughout Wales and be part of the wider green recovery.

The response also included additional information on the BPS entitlement trading window which will be extended from 30th April and remain open all year round.  For entitlements to be available, transfer and lease forms must be submitted by midnight on 15th May in a scheme year.

2020 BPS Payments

The payment window for the 2020 BPS opens on 1st December.  However, in Scotland the National Loan scheme which has been running since 2016, means many farmers and crofters have received a 90% advance on their payment already; these started in September.  For England and Wales, the beginning of December sees the earliest they will receive their monies.  Wales has a good record for paying on the first day of the window, but for those claimants who do not receive their payment in the first week of December it is possible to get 90% of their estimated payment via the 2020 BPS Support Scheme as long as this has been previously applied for; the deadline for applications was 27th November.

England does not have a ‘support’ scheme, but anecdotal evidence appears to show more payments could be made in the early tranche.  Claimants are reminded they can check the progress of their claim via the Rural Payments website.  On the ‘Basic Payment Scheme’ page of a claimant’s account, go to ‘Apply for BPS or view status of your application’.  As the claim progresses it moves through three stages ‘Claim validation’, ‘Final checking’ and ‘Preparing for Payment’.   Once the claim has reached the latter stage, this means it is ready for payment.

Frustration at Scottish Policy Vacuum

The Scottish farming sector is seemingly getting increasingly frustrated by the lack of a clear direction for farm support.  Speaking at the online AgriScot event, the President of NFU Scotland, Andrew McCornick stated that the Scottish Government needs to ‘stop dithering and start delivering’ on future policy for Scotland’s farmers and crofters.  He went to add ‘The Cabinet Secretary and Scottish Government must have desks that are buckling under the weight of commissioned reports and stakeholder input, promoting policy and a way forward.  With still more reports in the pipeline to come.‘  The latter point is almost certainly referring to the Farming and Food Production Future Policy Group which is set to deliver its recommendations before the end of the year.  The NFUS has been a big supporter of the ‘Stability and Simplicity’ approach of not making any major support changes until 2024.  However, even the Union now seems concerned about the complete lack of progress on what  support from 2024 onwards might look like.    

Scotland 2020 BPS Rates

Scottish farmers and crofters will see an increase in their BPS payment rates this year.  This is due to a budget review and also because there will be no Financial Discipline deduction from 2020 payments; previously used to fund the EU Crisis Fund.  This means Region 1 will see a 3.1% increase compared to 2019 payments.

However, 2019 claimants also received £90m worth of Convergence money via top-ups to their BPS and coupled payments.  There is a further £70m which the Government has indicated will be made available from January to April 2021.  But in the announcement there was no mention of the Convergence funding and it is unclear how this will be distributed.  In the past, there has been strong hints it would be used to top-up the Less Favoured Areas Support Scheme (LFASS), but there was no reference to this in the News Release earlier this month which announced LFASS payments would be increased back up to 2018 levels.  NFU Scotland has always maintained that the Convergence money was obtained through Pillar 1 payments (eg. BPS) and should therefore be used to top-up these and not be used to resolve the shortfall in LFASS.  We will endeavour to keep readers up to date with the situation.

The table below shows the published rates in Euros, our estimates and the actual payment that farmers will receive in Sterling and a comparison with last year, before convergence payments.  For 2020 the exchange rate has been locked at the  2019 level; €1=0.89092.

Annual Investment Allowance

The Government has announced an extension to the temporary increase in the Annual Investment Allowance (AIA).  In the 2018 Budget, the cap was increased from £200,000 per annum to £1 million.  It was due to revert back to £200,000 on 1st January 2021 but will have a year-long extension until 1st January 2022.  The AIA provides businesses with 100% same year tax relief on qualifying capital expenditure which includes plant and machinery.  This extension will help those businesses looking to invest in new pieces of machinery, but unfortunately not for investment in agricultural buildings or infrastructure.