CAP REFORM, TENANCIES, TAX AND OTHER MATTERS

Jeremy Moody

CAAV Northern Group Conference York – 18th September 2013

CAP POST-2013

Complexity Not Reform

Health Warnings

ALL THAT FOLLOWS IS BASED ON THE DEVELOPING DOCUMENTS. IT IS BASED ON THE PARTS MOST RELEVANT TO THE UK AND

ENGLAND WHICH THEN HAVE MANY OPTIONS FROM WHICH TO CHOOSE

WE ARE NOT YET AT A FULL FORMAL SETTLEMENT OF EVEN

HEADLINE REGULATIONS AND WAIT FOR THE IMPLEMENTING REGULATIONS

NO ONE UNDERSTANDS THE EU’S NEW LEGISLATIVE PROCESS. SOME DETAIL MAY CHANGE – AND PROBABLY BECOME MORE

COMPLEX COMMISSION RESERVING MANY POWERS – WEAKENS CERTAINTY

FOR PLANNING

The CAP Deal is Done ….

• Irish Presidency ended 30th June - desperation to do a deal

• Negotiations between Council, Parliament and Commission

• Main deal struck late afternoon 26th June • Key financial points left to the renewed 2014-

2020 budget (MFF) negotiations on 27th June • We know the architecture but much detail is

awaited

CAP –v- MFF

• CAP deal left some MFF points (not accepted by Parliament) to budget (MFF) discussions

• Transfers between Pillars (flexibility) – Power to move up to 15% from direct payments to

RDR? (And up to 25% the other way (for UK)?) – European Parliament wantstlimitthis?

• Degressivity (in place of capping?) • Crisis Reserve • Await decisions - in September/October?

The UK Cash Position

• UK Direct Payments money looks roughly level in cash terms – down 2.5% by 2020

• UK RDR money – seems cut by 5.5% - less than expected – Watch squeeze on agri-environment

• But in € - watch exchange rate • Other issues • These funds to be divided between the 4 parts

of the UK

The CAP Package • 4 regulations agreed • Direct Payments – delayed implementation to 2015

– Basic Payment, Greening, etc.

• Rural Development – from 2014 – Agri-environment-climate schemes – Organic schemes

• Horizontal – from 2014 – IACS rules, inspections, penalties

• Common Market Organisation – from 2014 – Sugar, milk, contracts, POs

The UK Carve Up • UK money agreed with EU

– Subject to financial discipline – Exchange rate changes

• Split between the 4 countries • Each splits into payment areas • Each decides how much to move between

Direct Payments and Rural Development – New modulation – Decide by 31/12/13 – Then know what have for Direct Payments

Pillar 1 to Pillar 2?

• DEFRA likely to transfer 15% from Direct Payments to Rural Development

• Replaces current modulation • If not done, may be little or no money for

– New agri-environment-climate schemes – New heading for innovation funding

• BUT largely shifts income to where it will compensate for costs of targeted schemes

Splitting the Direct Payment • Regional/Area Direct Payment Money of £xm • 30% to greening • 70% to Basic Payment BUT

– Up to 3% to National Reserve – Up to 2% to Young Farmers Top Up – Up to 8%+ to coupled payments (Scotland) – Options for Small Farmer Scheme, ANC (=LFA)

payments – assume not taken

• All these reduce the general Basic Payment

The Basic Payment Scheme

Basic Payment Scheme • Applies from 1st January 2015 • First BPS applications in May 2015

– 2014 = last Single Payment Scheme applications • To claim BPS

– Be an “active farmer” – Hold entitlements – Declare all eligible hectares – Match entitlements against eligible hectares

• Can set minimum claim size up to 5 ha • What is an “active farmer”? • How to obtain entitlements? • What is an “eligible hectare”?

What is an “Farmer”? • A “farmer” must undertake agricultural activity • Agricultural activity includes

– Producing, rearing or growing agricultural products; or – Maintaining agricultural area in a state that makes it

suitable for grazing or cultivation without any particular preparatory action (= GAEC 12?); or

– Carrying out a minimum activity on agricultural area that is naturally kept in a state suitable for grazing or cultivation – level of activity to be set by Member State (what does this mean? How is it identified?)

Who is Not an “Active Farmer”

• Those who fail one of two tests • Where the land is mainly (over half?) naturally

kept in a state suitable for grazing or cultivation, does farmer meet minimum activity test? • Can produce on rest of land ad still fail

• Mandatory negative list of the “undeserving” • Does not apply where less than €5000 in previous

year

The “Undeserving” • The short mandatory negative list excludes those

“operating” (what is “operating”?) the following:- – airports, railway services – water works – real estate services – what are these?

• probably services to real estate • probably not letting storage or holiday cottages

– permanent sports and recreational grounds

• Member States can add to this list • Can appeal and then re-qualify if agricultural

activity is genuine and significant

How to Obtain Entitlements?

A: England (and Northern Ireland?) has the option to roll forward current entitlements

– Will DEFRA take it up? This autumn? – Big issue is quality of entitlements register – English planning needs to think of both options

OR

B: Default rule – All current entitlements are cancelled 31/12/14 – New allocation of BPS entitlements in 2015

A: Rolling Forward Entitlements • England seems to have option to roll forward • Current entitlements held would be rolled forward

– 2013 status seems unnecessary – Will still need to meet “active farmer” test to claim

• Number of entitlements already fixed (c. 8.69m) – No opportunity from taking on additional eligible land a – Lose excess if too little area/too many entitlements in

2015

• Not clear – What happens to leased entitlements – What may be available through national reserve

B: New Entitlements Allocation

• For new allocation – how to qualify? – Have “2013” status - successful claim - and – Be an “active farmer”

• 2015 - apply for new allocation – Declare eligible land which is “at your disposal”

• Number of entitlements allocated is based on the number of eligible hectares declared 2015 – DEFRA can restrict number of entitlements

allocated to number declared in 2013

B: Points to Watch

• Keep SPS 2013 claimant identity – May yet include options for 2009-2012 in addition

• If do change claimant identity (e.g. partnership dissolution) – risk of destroying eligible BPS claimant – Wait on implementing regulations

• 2013 status excludes those who do not have it – What routes are available to them?

B: Business Continuity

• What happens to 2013 status on: – Death? – Partnership split?

• Subsequent business changes – Two farmers going into partnership?

• Answers from EU in spring 2014? • Take care

B: If Don’t Have 2013 Status …..

• 2013 farming activity evidence - producing, rearing or growing agricultural products, not GAEC.

• National reserve - to allocate entitlements • Contract clause - to transfer 2013 status • Buy entitlements after allocation • Let land to a tenant who has 2013 status

The Contract Route • Can transfer “2013” status with land sale/lease

– But with no other arrangement – Perhaps like private contracts of 2004/5 – Seems can transfer to more than one buyer/tenant – Transferee must be an “active farmer” – Using this may mean vendor/landlord cannot keep status

• problem where have retained land and want to claim

• Do not have detailed rules yet – Can now only agree to have a retrospective contract – CAAV draft contract clauses for tenancy agreements

National Reserve • “New entrant young farmers” – a priority

– Under 40 (as at May 2015?), started as head of business in previous five years

– At regional average (and can claim top up)

• Other new entrants (starting after May 2013?) – At regional average

• Within 3% of direct payment money • Assume claim in 2015 • No sign yet of restrictions on use/transfer

What is an Eligible Hectare? • The definition of an “eligible hectare” is relevant to

allocation of and activation of entitlements • It must be “agricultural area”

– Arable, permanent grassland or permanent crops

• That is predominantly used for agricultural activity – Non-agricultural activity still permitted, but to what

extent?

• Must be in an eligible land use for calendar year • Must be “at the disposal” of the claimant

– on a single date – 15th May, but artificiality provisions remain

What Land is At My Disposal? • Am I farming it independently? • Do I control cross compliance? • Who does not have land at their disposal?

– Landlord – tenant is farming – Contractor – he is providing service to farmer – Grazing licensee – only on land to take crop and

does not control cross compliance – Cropping licensor – someone else is farming land

and controls cross compliance – really a tenant of the cropped land?

Payment Areas: England

• Will there be the same payment areas as now? – Could there be two? – No change is rolling forward?

• Payment values could change – Same relative payment values? – Will payments go up the hill? – Where should the money be?

Young Farmer Top Up • Now mandatory on member states • No more than 2% of BP money • For “New Entrant Young Farmers” • Under 40 at May 2015? - starting as head of

business • Paid for first 5 years in business

– So started in 2013 – paid from 2015 to 2017

• 25% top up in various options on up to 90ha • Claim top up each year

– not part of entitlement value and so not transferable

Value of “Old” Entitlements?

• All UK entitlements can be used for 2014 claims – So value in transfer by April 2nd 2013

• Where new allocation (England?) – Old entitlements extinguished – Payment values based on 2014 position – Negligible value claims for CGT on purchased

entitlements

• If rolled forward (England?) – Market will give its view once it knows that is

happening

Value of New Entitlements? • Depends on income and area of naked land • Income includes access to greening element • England – similar multiplier for the income? • Wales/Scotland

– Rising area value adds income – High value claimants will lose income – New allocation likely to reduce naked land – England: multipliers fall if land is relatively scarce – Effect if national reserve is kept open?

Cross Border Claims

• Problems where claimant has land in more than one area or part of UK

• What if moves between parts in 2014/15? • Local rules apply to the land • Could he be active farmer in one part but not

another?

Degressivity • In place of capping • Coming forward in CAP as outside MFF deal • Referred back to MFF deal – no decision? • Small percentage – 5%? – to be deducted

– European Parliament might want more?

• From claims over €150,000/€300,000 • Agricultural salaries deduction - optional • Member states could set higher figures

– Even 100% - so optional capping by backdoor

Degressivity - II

• What might happen? • DEFRA may do least required – say

– 5% held back from payments over €150,000 – No decisions for agricultural salaries

• Wales consulted on taking increasing amounts over €150,000 with full capping at €300,000 – 59 farmers get more than €150,000 – Maximum possible payment is €250,000

Redistributive Payment

• Alternative option – requested by France • Greater payment for first 30 ha

– Or up to average holding area in MS (UK 54 ha)

• Can use up to 30% of basic payment money – In England 65% top up would use 14% – So less for larger claimants

• DEFRA may only look at this if degressivity gets worse

Greening and

Agri-Environment-Climate Schemes

Greening • Compulsory for Basic Payment claimants • Applies to all eligible land, not just claimed area • 3 default measures

– Permanent grassland – Crop diversification – Ecological Focus Area (EFA) – Greatest impact on arable use

• Alternative “certification” scheme - equivalence • No double funding – cannot pay for same

measure in Pillar 1 (DP) and Pillar 2 (RDR)

Default Measures – 1 Permanent Grassland

• Definition of “permanent grassland” – 5 years or longer out of arable rotation – Includes land that can be grazed but where grasses

not traditionally predominant

• Can be monitored nationally (as now), regionally or farm level – 2012 reference area – must not fall by >5% – If does fall below threshold, must reconvert – Must also designate permanent grassland protected

by Birds and Habitats Directives

Arable Land Crop Diversification and EFA

• Both Crop Diversification and EFA focused on “arable land”

• Definition of “arable land” seems to include – Land cultivated for crop production or areas

available for crop production but laying fallow – Includes land under greenhouses

• Temporary grassland currently defined as “arable” – But seems to be missing from definitions for new regime – Where does it sit?

Default Measures - 2 Crop Diversification

• Crop Diversification not required if 10 ha or less of arable land

• >10 ha up to 30 ha arable land – at least 2 crops

• >30 ha arable land – At least 3 crops – Main crop no more than 75%

• Winter and spring varieties – different crops • How to identify? – a return to multiple crop codes

CD For Whom?

• An issue for those who have: – Between 10 and 30 ha of arable land and do not

do two crops – Over 30 ha (74 acres) of arable land and do not do

three crops

• Then the exemptions • Issues round specialist crops

– Those who do not do enough crops – not many? – Those who make land available at risk?

CD Exemptions - I

• Is arable land less than 30ha? • If so, the two exemptions - where • Over 75% of eligible agricultural area is

– permanent grassland – used for production of grasses or other herbaceous

forage

• Over 75% of arable land is used for production of grasses or other herbaceous forage – i.e. is ¾ of arable in temporary grass?

CD Exemptions - II

• A third exemption • Perhaps a help where land moving between

famers for specialist cropping • Two tests

– Over half the arable land in farmer’s claim was not on it in the previous year

– All his arable land is now growing a different crop to previous year

Illustration

• Year 1 – Farmer A has 35 ha arable; all to wheat - a CD problem

• Year 2 – he let 20ha to B for potatoes; keeping 15 ha - A should grow 2 crops

• Year 3 – A resumes possession, uses all 35 ha for a new crop. He is outside CD for the year: – as the 20ha is more than 50% of his arable – was not on Year 2 claim and – all land is in new crop.

Real Moral? • May 2015 is nearer than you think

– Cropping decisions in the next few months set background for exposure to crop diversification

– Seed ordered in Spring 2014 may be the crop on the May 2015 form

• Only the most specialist croppers caught? – But it may catch those whose land they use

• Plan and think ahead – Managing land occupation arrangements may be

an answer in some cases

Default Measures – 3 Ecological Focus Area

• EFA not required if 15 ha or less of arable land – Differs from CD’s 10 ha and 30 ha thresholds

• Where >15 ha of arable land – 2015 - 5% of arable area as EFA; to 7% in 2017?

• Fallow land, landscape features, buffer strips, agro forestry, afforested lands, strips of eligible land along forest edges, nitrogen-fixing crops, ….

• EFA must be located on the arable area – Landscape features may be adjacent to it

EFA Exemptions • > 75% of eligible agricultural area is

– Permanent grassland – Used for production of grasses or other herbaceous

forage (temporary grass) – Cultivated with crops under water for significant part of

year/crop cycle

• > 75% of arable area is – Used for production of grasses or other herbaceous

forage – Land laying fallow – Cultivated with leguminous crops

• Only apply where arable land not covered by these uses is not > 30 ha

EFA and Weighting • Weighting matrix proposed

– Evaluation of relative environmental outcome

• EFA features designated on environmental delivery • Examples

– “Extremely high value” - hedges – “Very high value” – buffer strips, walls, ditches … – “High value” – fallow land, nitrogen fixing crops ….

• Commission to produce coefficients to be applied – Area and linear

• All yet to be agreed – Likely to appear in implementing rules

EFA and Mapping! • EFA starts in 2015 but …. • Mapping of “stable features” deferred to 2018 • Issues

– When is a landscape feature a landscape feature?! – Who can claim the landscape feature as EFA?

• Interaction with current mapping of permanent ineligible features (PIFs)? – Some may be eligible for EFA

• 2015-2017 – need to monitor/inspect – How to identify? Sketch maps?

Greening Penalties

• Maximum penalties – 2015 and 2016 – 100% of greening payment – 2017 – 120% – 2018, etc – 125% (i.e. 37.5% of English claim)

• Cannot simply opt out of greening • Assume minor infringements attract lesser

penalties • Claiming and doing nothing could be fraud

The Alternative ….. National “Certification” Schemes

• Organic was already exempt from greening • Option of an “equivalent” greening scheme

– Other measures to be at least equivalent to default greening measures offered

• List of pre-approved alternatives to each default greening measure

• Looks as though can pick and mix • DEFRA will look closely at national certification

– Replacement for Basic ELS?

Interaction with Agri-Environment Schemes

• No double-funding – agri-environment scheme measures must be more

demanding than greening

• Future agri-environment scheme design can take account of this

• Agri-environment scheme agreements under current regime that continue into new one – Unclear whether will have to amend – If January 2012 onwards agreement – revision

clause

Rural Development • At least 30% to be spent on agri-environment-

climate (AEC), organic and other land management schemes

• Wide range of other measures possible • Competition and innovation • LFAs to become Areas of Natural Constraints

– To be redefined by 2018

• Farm Advisory Service – wider remit

AEC Schemes • AEC schemes - New title, new requirements • DEFRA introducing New Environmental Land

Management Scheme (NELMS) • Current RDP ends 31st December 2013 • Launch of new RDP for England

– 1st January 2015 – BUT move to annual start dates for agreements – Means new NELMS agreements – 1st January 2016

• A gap - 1st January 2014 – 31st December 2015 – How to manage transition?

2013 - applications

• ELS/Organic ELS/Uplands ELS – Last agreement start date – 1st December 2013 – NE must receive applications by 1st September

• HLS – FEPs already commissioned – Effectively now closed to new applications

Transition and 2014 • DEFRA confirmed earlier in July

– Still subject to EU agreement

• Existing ‘classic’ agreements expiring in 2014, SSSIs and other ‘high priority cases’ – new HLS agreements – new ELS agreement to expiring classics which do not

meet HLS criteria – new Uplands ELS

• New agreements on general offer in 2014 – Uplands ELS and Organic ELS, not ELS

• No renewals apart from Organic ELS

2015

2016 - NELMS • Move to uniform start dates

– First agreements start 1st January 2016 – Single application deadline in 2015? When?

• Will dual use survive in practice? Assume not • NELMS to build on best elements of current ES

– More targeted – less money – 30% of area? – Focus on environmental outcomes – Landscape scale delivery - facilitation – Advice provision – locally tailored – Single scheme but with tiers?

Where Now? Some Issues

Where Now? • When do we get final texts of these main

regulations? – October/November 2013?

• When might we know the EU detailed rules? – Discussions start in September on c. 220

issues – Should be in Spring 2014

• When might we get national decisions? – From late autumn 2013 into 2015

Farm Structures • What if 5 ha minimum claim size? • Degressivity – if only 5% over €150,000 – not

worth avoiding? • Greening – does this give value to permanent

grassland? • EFAs – for whom is 5% arable as EFA a

problem worth solving? But 7%? • Crop Diversification – does this drive changes? • Prepare for end of Dual Use?

– Who is to be paid – restructure arrangements?

Some Issues? • Where on agri-environment schemes? • Will England roll entitlements forward or

create new entitlements? – Changes to payment regions?

• Issues from redrawing LFAs and ANCs? • Wales/Scotland

– New payment regions – Handling phasing – Claimants maximising positions

And Practically?

• Keeping 2013 claimants • Land sales and lettings • Protect 2011 claimant’s identity until more

known • Get land occupation arrangements right • Judge in the round and keep perspective

– do not be obsessed - e.g. If there were to be a conflict with IHT planning, which is more important?

SOME TENANCY POINTS

TRIG/Macdonald • Two measures coming through TRIG and

Macdonald work • Modernisation of Model Clauses • Option for Independent Expert in 1986 Act

disputes • TRIG also proposing deregulation Tenant Right • All now moving into legislative machine • Consultation next year? • Implementation - perhaps late 2014

Revising Model Clauses

• Present regs 1973 with minor change in 1988 • In need of review

– New issues – Contested issues of electrics and water pipes – Safety checks – Cash limits – Tidying up law – Maintain broad balance between parties

Proposals • Consolidated regs with an extended table

allocating liabilities by columns for clarity – Recognises new items – radon pumps etc – Also gas and electric checks – Some items in regular use (electric fittings, door

furniture, moving parts) for tenant to repair and replace

– Electrics – system landlord’s; fittings tenant’s – Water – underground landlord’s; above - tenant’s – Cash figures up-rated and then indexed by RPI

Independent Expert

• As option for parties in 1986 Act tenancies – Would be alternative to arbitration

• Mirroring 1995 Act • Would be available for all issues except

notices to quit • Final and binding • Use – where third party answer is needed for

simple disputes – smaller rent reviews?

Tenant Right • Current regs 1978-1983 • Impose detailed figures still unchanged • Increased and volatile fertiliser prices have led

to pressure – Ingoer benefits at outgoer’s expense

• DEFRA will not redo figures – dated approach • Proposals

– Overhaul and modernise current schedules – Leave to valuations

1986 Act Rent Reviews • Should shortly publish guidance on Scottish

rent reviews • Sister text to 2008 paper on 1986 Act reviews • Driven by absence of guidance and decision in

Morrison-Low v Paterson • That commented on many points - Themes:

– Realism – Reliance on good expert witness evidence – Challenge to the profession – show methods

Issues • Scotland has separate law – 1991 Act, etc • BUT s.13 close enough to Schedule 2 for

commentary on each to be relevant to the other

• Evidence – which comparables v budgets • What comparables v budgets? • Scarcity • Improvements • Marriage value

Comparables • Best are new lettings under same Act • In their absence, then fresh arm’s length

lettings of other agricultural tenancies – LDTs (10/15 years+), SLDTs (<5 years) - so FBTs – To be adjusted – How to compare? – Does disregard of scarcity remove security issue?

• Then sitting tenant reviews – used as benchmark of realism

Comparables v Budgets

• Comparables can give evidence of market behaviour

• Inform the “reasonable expectation” of the rent that would be agreed

• Budgets do not – may set a framework • What do to do with result? Not a ceiling. • Court of Session said lowest form of evidence • BUT what if only evidence left?

Scarcity • This has had very little attention for 1986 Act • Childers v Anker avoided it • Directly discussed in Morrison-Low v Paterson

– Expects expert witnesses to advise in it with methodology – so analysis needed

• There is case law on residential fair rents and some Scottish land Court decisions

• Distinguish uncovenanted benefit of a tight market from amenities of property

• Interaction with marriage value

Tenant’s Improvements

• How to assess increase in rental value? – Black patch – practical answer but how to assess – Comparables - better for more major works? – Budgets – but how to link to market evidence? – Cost basis - likely to be wrong

• But allow for latent value – Tummon v Barclays Bank – The value of the opportunity to make the

improvement

ALT in England • Now moved to be First Tier Tribunal (Property

Chamber) – Agricultural Land and Drainage • Also Rent Assessment Committees, etc • Under Ministry of Justice • As of 1st July 2013 • Appeals to Upper Tribunal Lands Chamber (old

Lands Tribunal) • Wales remains as was

– But appeals to Upper Tribunal

Practicalities • Transfer of Tribunal Functions Order

2013/1036 • ALT members moved over – now judges • ALT areas abolished • Cases that started before 1st July remain on

old rules • See Schedule 3

• New Tribunal rules – 2013/1169 – Thought more useful

Gas Safety • Gas (Safety and Use) Regulations 1998 • Direct landlord of a dwelling has responsibility

– Unless lease is more then 7 years without break

• To test and obtain gas safety certificates – Appliances and flues – Annual checks and records

• Catches farmhouses, cottages, caravans • Tenant liable for sub-let cottages

– Licences – probably head landlord?

SDLT on Tenancies

• Due at start of let if liable then • But can become liable if tenancy continues • Must anyway notify if for more than 7 years or

on seventh anniversary of continuing tenancy • Once liable for tax on a continuing tenancy,

was annual self declared charge • Finance Act 2013 rolls this up to be settled

once in the 30 days after the final end

Thank You ... … Questions?

jeremy@caav.org.uk

The Private Rented Sector

Kate Russell BSc(Hons) MRICS FAAV Central Association of Agricultural Valuers

Becoming a Hot Potato...

• Slow growth in house building • Continuing issue of affordability of home ownership • Welfare budget squeezed • Will a generation be priced out of ownership and forced to rent? • Attention has turned to the private rented sector.

Growing political interest

• Office of Fair Trading: ‘The Lettings Market’ (February 2013) • Welsh White Paper ‘Renting Homes: A Better Way for Wales’ (May 2013) • Scottish ‘Strategy for the Private Rented Sector’ (May 2013) • Shelter: ‘Letting Agencies – the Price You Pay’ (June 2013) • CLG Select Committee: ‘The Private Rented Sector’ (July 2013)

What are the perceived issues?

• ‘Rogue’ landlords – calls for landlord registration (compulsory in Scotland) • ‘Rogue’ agents – calls for licensing or regulation of letting agents • Security of tenure – some suggestions for longer term agreements to be incentivised • Rental levels – some discussion of rent regulation

Next steps in England

The Enterprise and Regulatory Reform Act 2013 provides for further Regulations (yet to be published) requiring letting and managing agents to be registered with a redress scheme, such as The Property Ombudsman.

Current practicalities: Tenancy Deposit Schemes

Superstrike v Rodrigues [2013] - Fixed term tenancy commenced before deposits had to be protected - At end of fixed term, a statutory periodic tenancy commenced (after deposits had to be protected) - LL should have protected the deposit at that point

Current practicalities: Tenancy Deposit Schemes

Q: Should deposits be re-protected (and Prescribed Information re-issued) at the start of a new fixed term tenancy? A: It would be good practice to do so.

Q: Should deposits be re-protected (and information re-issued) at the start of a periodic tenancy? A: Perhaps, but the court did not address it

Current practicalities: Tenancy Deposit Schemes

Guidance from the Tenancy Deposit Scheme providers can be downloaded from the CAAV website.

What else?

The Second Edition of the CAAV Numbered Publication ‘An Agricultural Valuer’s Guide to Residential Tenancies in England and Wales’ will be published this month.