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Brexit Update

Although activity in Westminster and Brussels is usually subdued during the August holidays, this year it is more of a sense of calm before the storm as the Brexit process is expected to reach its climax in October. That said, there have been several noteworthy developments in recent weeks from an agri-food perspective.

Government’s No-Deal Brexit Preparations

Since coming to power last month, the Johnson Government has ramped up its preparations for No-Deal considerably.

On 21st August, the Chancellor announced that HMRC is automatically registering over 88,000 VAT-registered companies to be allocated an Economic Operator Registration and Identification (EORI) number.  This enables businesses to be identified by Customs authorities when conducting overseas trade. This is very much the first step required for businesses to continue trading with EU Member States post-Brexit and affected companies should start receiving notification letters in the coming days.  For businesses that trade with EU Member States which are not VAT-registered, and do not currently have an EORI number, they will still need to register if they wish to continue trading with the EU.  Further information on doing this can be found via; https://www.gov.uk/eori

For businesses trading in live animals and animal products, the Government has also published additional guidance on importing from, and exporting to, the EU (and countries such as Switzerland, Norway and Iceland which are also considered to be covered by EU trade). The following link lists the various certifications and approvals required when importing into Great Britain from the EU; https://www.gov.uk/guidance/moving-live-animals-or-animal-products-as-part-of-eu-trade

Earlier in the month, a leaked Government document on the Government’s No-Deal preparations reported by The Times (dubbed ‘Operation Yellowhammer’) suggested that the UK would face shortages of food and fuel in the short-term as there would be considerable delays at Ports as well as the re-imposition of a Hard Border in Ireland.  The Government subsequently claimed that the report was dated and that significant steps to prepare for a No-Deal Brexit have been taken since.

Whilst it is evident that the Government is ramping-up its preparations, it is also apparent that a No-Deal Brexit would cause significant upheaval in its immediate aftermath.  Although this could bring some longer-term opportunities, the concern amongst many in the industry is that the almost instantaneous change in the trading relationship with the EU would exert severe pressure on just-in-time supply chains at a time when storage capacity will be already limited in the lead-up to the busy Christmas period. 

Impact of a No-Deal Brexit on Farm Profitability

With the UK due to leave the EU on 31st October and the possibility of a No-Deal Brexit becoming more likely, The Andersons Centre (Andersons) recently conducted research on behalf of the BBC to assess its potential impact on the profitability of UK farming, 9-12 months after Brexit taking place.

To undertake this analysis, Total Income from Farming (or TIFF) is a useful measure to look at the farming industry as a whole.  It is an aggregate, so hides differences between sectors and individual businesses, but provides a simple measure of the profit of ‘UK Agriculture Plc’.  In technical terms, TIFF shows the aggregated return to all the farmers in UK agriculture and horticulture for their management, labour and their own capital in their businesses.  To allow for yearly variations in weather conditions, markets and exchange rates for example, a three-year average (2016 to 2018) was used as the basis for comparison.

Taking into account previous studies a top-level assessment of the impact of both a Brexit Deal and a No-Deal on the output of each farming sector was compiled in addition to an estimation of the effects of both Brexit scenarios on key costs which are incurred by UK farming.  This assessment considered the potential impact of tariffs (including the UK’s March 2019 announcement on its No-Deal Brexit tariff schedule), non-tariff barriers and tariff rate quotas.  Importantly, it was assumed that support levels to UK farming were kept constant as the UK Government has committed to farming receiving current levels of support until the end of this Parliament (scheduled to be 2022).

Under a Brexit Deal scenario, a small decline in profitability (3%) is projected; however, under a No-Deal, an 18% decline is forecast.

Impact of Brexit on UK Farm Profitability under a Deal and No-Deal Scenario

Sources: The Andersons Centre

Like all top-level industry averages, there is significant variation within the overall estimate.  For instance, where output is concerned, substantial declines are forecast for sheepmeat (-31%), whilst output for cereals, milk and beef production are also down.  Some increases are projected for horticulture and intensive livestock (pigs and poultry) provided there is sufficient labour available for undertaking operations.

With respect to costs, some decreases are forecast for inputs which would be affected by the introduction of lower UK import tariffs under a No-Deal scenario.  Examples here include animal feed, fertiliser and plant protection products.  However, other inputs such as veterinary costs are projected to rise as it is anticipated that there would be a significant increase in demand for veterinary staff to assist with border inspection operations.

An 18% decline in profitability would equate to a hit to UK farming generally of almost £850 million.  With many farms already struggling to break-even, the viability of many farming businesses will be in jeopardy. Unsurprisingly, grazing livestock farms (particularly sheep) would be the most exposed given the output declines mentioned above, but a No-Deal would also result in a significant downturn for dairy farming in Northern Ireland, given its reliance on having its milk processed in the Republic of Ireland.

For further information on how a No-Deal Brexit could affect farming and to address the trade-related risks arising, Andersons is running a webinar on Thursday, 12th September to provide further information on how businesses can prepare. Further information is available via:

https://attendee.gototraining.com/r/1384475755831393282

30 Days to Find Backstop Alternative

Despite its intransigence for much of the summer on renegotiating the Withdrawal Agreement (including the Backstop), the German Chancellor gave some hope to the Prime Minister when she suggested, on 21st August, to give the UK Government 30 days to come up with an alternative arrangement which is legally operable and would not result in infrastructure along the Irish border.  However, the EU was adamant that this did not mean that the entire Withdrawal Agreement could be negotiated which some in the UK have been seeking.

This additional flexibility from the EU is a welcome development as it is clear that the only way to resolve the outstanding issues is to at least have the opportunity to talk about them. The EU’s previous stance of seeing the Withdrawal Agreement as being completely closed and not up for any discussion was unhelpful and was ramping up the possibility of a No-Deal Brexit.  That said, the EU is not going to budge on the central issue of having a fall-back (Backstop) that would apply unless and until a legally operable alternative to the Backstop would be found.

To date, all of the Alternative Arrangements’ proposals put forward have fallen short of the EU’s requirements. This is because the proposals have either required some form of infrastructure on the Irish border, checks between NI and GB or would undermine the integrity of the EU Single Market in some way.  Time will tell whether new ideas will come forward in the next three weeks or so to resolve the impasse or whether some ‘fudged Backstop’ will emerge containing elements of the existing Backstop, the previously proposed ‘NI-only’ Backstop and some additional alternative arrangements.

Opposition Coalescing Around Avoiding a No-Deal

Meanwhile in Westminster, various opposition parties (and some Conservative rebels) have been working more closely together to avoid a No-Deal Brexit on 31st October.  Although such discussions previously centred on putting forward a No Confidence motion in the Prime Minister, it now appears that the main focus is on forcing the Government to extend ‘Brexit Day’ beyond 31st October if the alternative would be a No-Deal Brexit.  This approach is thought to have the best prospects of getting Conservative rebels onboard as their support would be crucial.  The Prime Minister has not ruled out the possibility of proroguing (suspending) Parliament so that it would be unable to vote on such a motion.

Overall, as Brexit reaches its climax something is going to have to give. The Government is intent on exiting on 31st October “come what may” and the opposition is uniting around avoiding a No-Deal Brexit, initially via another extension.  Whilst the EU has made some very small concessions, it will not U-turn on its red lines which include the Backstop.  Amongst all of this, the possibility of another UK General Election should not be ruled out. 

For the UK food and farming industry, whilst the uncertainty continues, every effort should be made to prepare for a No-Deal Brexit because according to most experts, it is more probable now than at any time throughout the Brexit saga thus far. 

BPS or June Survey Areas, which are Correct?

Since the revision of the CAP in 2015, when Greening was introduced, the claim form for direct payments has become considerably more complicated. The necessity to record each crop, which was simply not a requirement of the Single Payment scheme is present with the Basic Payment because of the 3-crop rule.

For the second year running, Defra has published a comparison table comparing the June census crop area figures for England against the claimed BPS crop areas. A noticeable difference between the 2 sets of data has emerged, specifically in wheat, with an almost 7% difference in 2018 (BPS lower). This is equivalent to 108,000 hectares which at average yields is over 850,000 tonnes of wheat potentially  missing, certainly enough to have a considerable impact on the market, especially as it would shift the UK’s balance from that of a net exporter to net importer. The market reacted with an assumption the survey was incorrect which may not be the case.

Examination of the other crops suggests the differences between the two data sources have increased this year compared with the previous 3 years. As the tables below show, considerable differences  of the magnitude experienced in wheat (as a percentage of each other) are also seen in oats, beans and fallow land.

There were no differences to the forms this year, so whilst it is possible that claimants entered field edges and environmental scheme information differently, or entire field versus cropped field areas, one would expect the differences to be consistent year to year. It is barely possible that the different date of each form made any difference (even with the extreme weather conditions) as crops would have been planted for both dates; 15 May and 1 June. Defra is examining the discrepancy and we will report of the outcome when we know it.

Arla’s 13th Payment

After previously announcing that the entire 2018 net profits would be paid out to its farmers (see September’s article https://abcbooks.co.uk/?s=Arla), Arla has now confirmed this 13th payment will be 2.3 Euro cents/kg; the highest since 2012.  The amount paid to UK Arla members is expected to be announced on 8th March.  The conversion from Euro cents/kg paid in Denmark to ppl in the UK is fairly complicated, including an adjustment made for lower milk constituents in the UK, but the payment is expected to be about 1.55ppl; worth £31,000 for a 2m litre producer.  The payment this year is of particular interest to UK producers because, as most have now completed their capital payments into the business, they will actually receive the cash.

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

 

 

 

EU Withdrawal Bill

On 16th May, the House of Lords made its final amendments to the EU Withdrawal Bill.  During its passage in the Lords, the Government suffered 14 defeats during the report stage and one defeat at the third reading.  Peers also accepted 170 amendments that were proposed by the Government.

The amendments include;

  • Customs Union: would prevent the European Communities Act 1972 from being repealed until the Government has made a statement to Parliament outlining the steps it has taken to negotiate the UK’s participation in a Customs Union with the EU. This would need to happen by 31st October 2018. The Government can of course outline the steps it has taken but that does not mean that it will force the UK into participating in a Customs Union.
  • Challenges to retained EU law: if passed, it would remove the section of the Bill which enabled Ministers to use secondary legislation to establish when individuals could challenge the validity of EU law after exit day. Another proposed amendment would permit challenges to domestic law if it failed to comply with the general principles of EU law.
  • Meaningful vote: Parliament must approve the Withdrawal Agreement and associated transitional measures in an Act of Parliament.  If possible, this must be done before the European Parliament has debated and voted on the Agreement.  It also includes specific deadlines for the Government for agreeing, and legislating for, the Withdrawal Agreement with the EU and that it ‘must follow any direction’ approved by the Commons.  This would give the Commons the power to decide the next steps for the Government.
  • Future negotiations: would prevent secondary legislation to implement the Withdrawal Agreement until after Parliament has approved a mandate for negotiations about the future UK-EU relationship.
  • Northern Ireland: preserves North-South co-operation after Brexit and prevents the establishment of new border arrangements which did not exist before exit day, unless they would be agreed between the UK Government and the Government of Ireland.
  • Continuing relationship with the EU: to ensure that the UK could continue to replicate EU law, and to participate in EU agencies, after exit day. The former is seen as critical towards facilitating frictionless trade with the EU in agri-food products post-Brexit.
  • European Economic Area (EEA): if passed, the amendment would force the Government to make continued participation in the EEA a negotiating objective. Again, just because something is an objective does not necessarily mean that it will come to fruition and is seen by many as an attempt to give the Commons the option of keeping the UK in the EEA (Single Market).
  • Environmental principles: this would require the DEFRA Secretary to take steps to maintain the EU’s environmental principles in UK law post-Brexit and lists the specific principles which need to be given effect in domestic law. This amendment was passed as Peers argued that the ‘Environmental Principles and Governance after EU Exit’ published in a recent consultation document by DEFRA were inadequate, as it would subordinate the environment to housing and economic growth. This consultation document only makes limited reference to agriculture, primarily in the context of adopting sustainable land management systems. The document is available via: https://consult.defra.gov.uk/eu/environmental-principles-and-governance/
  • Devolution: proposed by the Government, this would give UK ministers the power to put temporary restrictions on the devolved administrations’ ability to legislate in certain devolved policy areas returning from the EU. The Government argues that these temporary restrictions are needed to prevent divergence across the UK as new frameworks are established. Whilst agreement has been reached with the Welsh Government on this, the Scottish Government is opposed. This amendment would potentially have significant implications for agricultural policy which is currently administered by the devolved regions. Greater control at the UK level would limit the extent to which agricultural policies in the four UK nations would diverge post-Brexit. It is also important in the context of food and animal health standards as any internal divergence in the UK would create headaches for the implementation of sanitary and phytosanitary standards for instance.

After the Bill has passed through the Lords, the Prime Minister appointed 10 more Conservative peers in an attempt to bolster her numbers. This will not make much difference to the Withdrawal Bill which will now be sent back to the Commons for consideration of the proposed amendments.  It is unclear exactly what the timeline will be as it had been hoped that the Bill could receive Royal Assent before the summer recess.  That target now seems unlikely.  It remains to be seen how many of the Lords’ proposed amendments will get acceptance from the Commons.  However, the stakes have been raised, and the greater the number of amendments, the greater the probability that the Government will lose on one or more of them.

Scottish Income Tax Rates

Rates of Income Tax in Scotland and the rest of the UK are set to diverge further following the Scottish Government’s Budget on the 14th December.  The proposals include a new Starter Rate and Intermediate Rate, as well as an increase on the Higher and Top Rates of Income Tax.  The proposals are designed to slightly reduce the tax burden on lower earners whilst taking more from those on higher incomes.  Overall it raises an estimated £160m extra.

INCOME TAX BANDS AND RATES - 2018/19
ScotlandRest of UK
BandsIncomeTax RateIncomeTax Rate
Starter Rate£11,850 - £13,85019%£11,850 - £46,35020%
Basic Rate£13,850 - £24,00020%
Intermediate Rate£24,000 - £44,27321%
Higher Rate£44,273 - £150,000*41%£46,350 - £150,000*40%
Top RateOver £150,000*46%Over £150,000*45%
Source: ScotGov, Treasury * Personal Allowance reduced by £1 for every £2 earned above £100,000