Your single farm payment and how to spend it

I’ve received my 2005 payment but not my statement – does this matter?

Yes. Without your entitlement statement, you cannot be sure that you’ve been allocated the correct area and payment entitlements. Any inaccuracies should be corrected now, to prevent ongoing problems.

How do I know what payment I will receive in the years ahead?

Although we know how the historic and flat-rate portions of the single payment will change, it is not yet clear what the deductions will be in each year. However, you can get a rough idea by doing some fairly straightforward calculations, says Francis Mordaunt of consultant Andersons.

First, work out what your historic element is, and how it will change over the years (see table below). Then take off the likely deductions including modulation and financial discipline. “Total deductions in 2007 could be between 12% and 20%, and are likely to rise to 23-37% by 2012. However, you also need to account for inflation, so a worst-case scenario could be 50% deductions in real terms by 2012.”

By budgeting for the changes ahead, you can better plan how you can put the money to best use. But be sure to calculate your income tax liability caused by the single payment.

What further reforms can I expect in the future?

EU commissioner Mariann Fischer Boel’s “Health Check” of the CAP in 2008 is likely to result in further cereal and dairy intervention cuts, an increase in compulsory modulation and capping of payments at E300,000, says Mr Mordaunt. These would take effect from 2009.

“If you’re expanding rapidly, it may be worth looking at setting up separate businesses to avoid capping.” He also expects set-aside to be phased out by 2012, an end to partial decoupling and a shift away from historic payments across Europe, creating a more level playing field for English farmers.

The 2008-2009 EU budget review will set the scene for the next CAP reform round after 2012. This is likely to result in phasing out all intervention and milk quotas, the end of historic payments and a sharp cut in the CAP budget, Mr Mordaunt reckons. A shift from direct farm support towards rural development payments and a phase down of the single payment by 2020 is also expected, he adds.

“Despite these changes, our view is that the single payment system is fairly robust and will remain in a similar form right through to 2020. Payments will reduce markedly from 2012 but I think they will still be with us in one form or another for some time to come.”

So what should I do with the money?

Despite much advice to the contrary, most farmers seem to have ploughed the single payment straight into their businesses – often to top up the overdraft. But this is not sustainable, and plans must be made now to ensure a profitable business in the future, says Mr Mordaunt.

“The single payment is an opportunity you have got for six or seven years at the current relatively high values. Use it to get away from unprofitable production – you have got to use this transitional period to get your business into shape.”

Options include adding value, maximising efficiencies and diversifying. “You need a clear vision of what your business is trying to achieve to be profitable without financial support.”

Are there any pitfalls I should watch out for?

Yes. You must ensure that you meet cross-compliance requirements – failure to do so could jeopardise some or all of your single payment. Common problem areas include animal identification and tracing and care of field margins.

You must also ensure you exactly match any set-aside contracts for non-food crops with your set-aside entitlements, and use any national reserve entitlements every year for the first five years of the scheme, or you will lose them.

What if I want to buy or sell entitlements?

Entitlements can be traded at any time, but beware the 10-month occupation rule for both trading and tax purposes. Also, if you can delay any sale until after 1 January, 2007, you will qualify for the full taper relief for capital gains tax, reducing the tax liability to 25% of the asset. However, if you are selling the farm, make sure you retain some land to remain a “farmer”.

Beware rule-of-thumb valuations, as every entitlement is different and capital values range from £20/ha to as much as £100,000/ha, says Ian Potter of Ian Potter Associates. And only sell your entitlements to raise capital as an absolute last resort, as current values are only up to two times the annual yield, making it a very poor deal, he adds.

Can I make money by trading up?

Yes – anyone with little or no historic value to their entitlements can sell them and buy in more expensive entitlements with a higher annual yield, says Mr Potter. “You can expect to get a 20-30% return on your money.” But check to see whether the dairy premium and sugar beet quota are included in the sale.

I have naked acres – can I profit from that?

Yes – anyone with entitlements, but no land on which to claim them, will pay good money to use your naked acres to claim the single payment, says Mr Potter. “You can also use them to buy in more valuable historic entitlements and claim them yourself.”

Can I trade set-aside entitlements?

Yes – disposing of set-aside entitlements is often very useful for livestock farmers with no use for set-aside. “There is a huge opportunity to get rid of your set-aside and buy in normal entitlements – or to leave the land as naked acres to rent out.”

However, beware set-aside dumping, where the receiver of the entitlements has no intention of actually farming the set-aside land – this could be illegal and may well be stopped by the EU, says Mr Potter.

I want to retire – what can I do with the money?

The single payment can be used to improve the farm business before handing it on to the next generation, or it can be invested outside of agriculture altogether to produce a separate income. Other alternatives include contracting out the land to a younger farmer and keeping back the single payment, says Mr Potter.

“You need to be financially independent when you retire – the single payment offers you an opportunity to take charge of your life and do something different.

“For people who keep plodding along relying on the single payment to prop up the business it will be a painful death. You are simply funding a hobby and it will be the family which ultimately gets hurt.”

The Farm Business Advice Service’s Knowing Your Options scheme is available to give free advice. Just make sure you have your SBI number and holding number to hand when you call.

*To return to the Farm Finance Special