uk200agricultural group specialist training course wednesday 23 june 2010
TRANSCRIPT
UK200Agricultural GroupSpecialist Training Course
Wednesday 23 June 2010
FARM SUPPORT AFTER 2012
June 2010
RICHARD KING
THE IMPORTANCE OF SUPPORT
2004/05 2005/06 2006/07 2007/08 2008/09
-500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
£m
FBS England – 2004 to 2009
-320
Agricultural Income
SOURCES OF FARM INCOME
-320
1520
Direct Subsidies
630
1370
20330
400
980
1320
30280
300
Source: DEFRA / Andersons
30280
430
-130
1430
Diversification excludes off-farm employment, investment, agricultural contracting etc.
180340
Diversification Agri-environ. Payments
200
420
-360
1380
120
Single Payment
LOAM FARM MODEL
• 600 Ha of combinable crops (W. Wheat, W. OSR, S Beans)
• 240 owned, 360 FBTs; owner, 1 FT worker, & harvest casual
2009
ResultGross Margin 418
Overheads 332
Rent and Finance 142
Drawings 110
Margin From Production (167)
£ per Ha
Single Payment and ELS 283
Business Surplus 116
2011 Budget
561
347
142
110
(38)
265
227
2010 Budget
556
338
143
110
(34)
267
233
FRIESIAN FARM MODEL• 150 cows averaging 7,500 litres on 100 Ha (part rented). • Year-round calving, liquid contract. Owner + worker.
2008/09
Milk 26.2
Total Output 28.2
Variable Costs 11.7
Overheads 9.7
Rent, Finance & Drawings 5.1
Total Costs of Production 26.5
Margin From Production 1.7
ppl
Single Payment and ELS 2.4
Business Surplus 4.1
2009/10
24.7
27.1
12.0
10.5
5.0
27.5
(0.4)
2.6
2.2
2010/11
25.2
27.6
10.4
10.5
5.0
25.8
1.8
2.4
4.2
MEADOW FARM MODEL• 154 Ha mixed lowland farm (114 Ha owned, 40 Ha on FBT)• Beef (suckler cows, and finishers) sheep and arable• Proprietor, 1 FT family worker + casual
2008/09
Livestock Gross Margin 407
Crop Gross Margin 139
Total Gross Margin 546
Overheads 490
Rent, Finance & Drawings 305
Margin From Production (249)
£ per Ha
Single Payment and ELS 234
Business Surplus (15)
2009/10*
440
121
561
460
301
(200)
261
61
2010/11~
455
150
605
471
305
(171)
249
78
Source: Andersons * estimate ~ budget
BACKGROUND TO THE NEXT REFORM
THE PROCESS AND TIMETABLE
- Current Intense lobbying (public debate to June)
- Autumn 2010 ‘Budget Review’ published (no figures)
- November 2010 EU Commission White Paper on CAP reform
- Mid 2011 Formal proposals on 2014-2020 Budget
- July 2011 Legislative proposals on CAP reform
- Mid/Late 2012 EU Farm Ministers & EU Parliament agree farm support reform ?
- Late 2012/Mid 2013 EU Heads of State agree budget ?
• Future of support under the CAP will be determined by next EU budget for period 2014-2020
• Single Payment 2012 is paid for out of 2013 budget
NEGOTIATING ISSUES• What is agreed for CAP (by Farm Ministers) may be over-
ridden by (later) budget deal (Heads of State)
• Potential policy vacuum for 2013 SPS year - roll-over of present system for one year?
• Attitude of new Farm Commissioner (Dacian Ciolos)
• Under Lisbon Treaty European Parliament now has a say in agricultural policy – slower reform?
• Discussion tends to focus on future of direct payments (SPS) as largest proportion of aid UK government wants phase-out of direct support (unlikely) other areas such as market support and Rural Development
also important
1B. Structural and Cohesion Funds:
35.6%
Competitiveness and employment:
9%
1A
Source: Commission / Andersons
5&6. Administration (& Compensation):
5.9%4. EU as a Global
Partner: 5.7%
3. Freedom, Security and Justice: 0.8% Citizenship: 0.5%
CURRENT EU SPENDING 2007 to 2013 Budget Period
• Average spend €139bn (£118bn) per year - CAP €59bn• Total Budget 1.1% of EU Gross National Income (GNI)
2B. CAP - Pillar 2: (Rural Development) 8.7%
2A. CAP - Pillar 1:
33.8%(SPS & Market Support)
WHAT ARE DIRECT PAYMENTS FOR?
A fundamental question without a simple answer.
• Compensation – for higher costs faced by EU farmers • Public Goods – habitats, landscapes etc. as a side-effect of
farming activity• Income Support/Social Policy – allowing farming businesses to
survive that otherwise wouldn’t – prevents land abandonment• Food Security – retains a critical mass of agriculture and a
certain degree of domestic production• Transitional Support – helping farmers adjust to a market
environment – how long?
Or a mixture of the above?
No clear idea of what they’re for difficult to design a scheme
CURRENT SPS
0
100
200
300
400
500
600
€ p
er H
a
Ave. Single Payment per Ha of Agricultural Land
Source: EU Commission / Andersons
Lat
via
Est
onia
Rom
ania
Lit
hu
ani
Por
tuga
lN
MS
-12
Sp
ain
Pol
and
Slo
vak
iaA
ust
ria
Sw
eden UK
Fin
lan
dC
zech
R.
EU
-27
L'b
urg
EU
-15
Bu
lgar
iaS
love
nia
Fra
nce
Hu
nga
ryIr
elan
dC
ypru
sIt
aly
Ger
man
yD
enm
ark
N'l
and
sB
elgi
um
Mal
taG
reec
e
WHAT MIGHT HAPPEN
SIMILAR / LESS MONEY FOR CAP
• A continuation of current budget (at current prices) best that might be expected
• Any cuts phased through to 2020
• CAP to fund more Member States (Balkans, Iceland etc.)
• Co-financing (of Pillar 1) a possibility -
Member States part-fund the SPS
Compulsory or Voluntary – ‘renationalisation’ of the CAP
RE-DISTRIBUTION OF PILLAR 1
• Direct Payments / SPS / Pillar 1 to continue through to 2020;
Recognisably the Single Payment Scheme
Entitlements to support, activated by occupying eligible land, and cross-complying
• More equal distribution (in per Ha terms) across EU Member States
• Switch to New Member States (little effect on UK?)
• Allocation not just on agricultural area – a formula bringing in costs, agricultural employment, land type etc. may be used
• MS allowed to pay differential regional rates
• Historic payment basis ended
SWITCH OF FUNDS TO RURAL DEV.
• Share of CAP funds going to Rural Development to rise
• Implies ‘2 Pillar’ model CAP remains
• Partially occurred already in the UK through high voluntary modulation
• Fairer allocation of RD funds among MS - similar to SPS – benefit to UK
• Any shift of funds phased through to 2020 – rebalancing of Pillar 1/Pillar 2 may remove need for modulation
• Targeting of larger SPS (and RD?) recipients to continue
OTHER POSSIBILITIES
• A ‘third Pillar?’;
EU Commission – Climate Change (including renewable energy)
NFU – Research and Development
• More ‘market regulation’?;
more interventionist approach as trade-off for less direct aid
insurance funds, counter-cyclical payments?
derogation for agriculture from EU competition laws?
import restrictions – animal welfare, health, carbon etc.?
• How would this fit with Trade commitments? – WTO, Mercosur etc.
UK IMPLEMENTATION
• Within EU framework, MS will continue to set precise rules• More scope for the industry to influence at this level?
Regional Rates• In England, relative values of 3 existing regional average rates
may be altered
• A mechanism for moving money from lowlands to the hills?• Scotland and Wales to move to regional system – regions, rates,
timing etc.
Net Estimated 2012 SPS Lowland SDA Moorland
£ per Hectare £225 £162 £33
UK NATIONAL ENVELOPES• ‘Article 68’ allows funds to be skimmed for specific purposes;
improving quality and marketing of agricultural products enhancing animal welfare supporting farming that is important for the environment contributions to insurance funds – risk management, animal
and plant diseases others may be added post-2013
• Not widely used in the UK under the Health Check
• Will DEFRA be tempted to use this if money is tight? – unlike Rural Development needs no co-financing
• WFD and Hill Support mentioned
• Would the industry support any such use?
UK RURAL DEVELOPMENT
• What should be the balance between Pillar 1/Pillar 2 in UK?
• Should/will the UK be able to shift money to Pillar 2 with continued voluntary modulation?
• Schemes for 2014-2020 need to be put forward
• Change in balance of English RD programme (currently 70% environmental)?
• Environmental Stewardship likely to remain largest beneficiary of RD money
• Does the ES need changing?
higher (ELS) payments - move away from ‘income foregone?
scheme between ELS and HLS?
FUTURE SPS IN FIGURES
• For 2013 assume a) reduction in UK SPS funds; b) a re-distribution of funds to the hills; c) lower voluntary mod.
• Gives a payment of £200 per Ha (£80 per acre)
• By 2020, larger cut in SPS funding phased-in plus other deductions to pay for new members
• Possible payment down to £110 per Ha (£45 per acre) (€1 = 85p)
• If Pound strengthens then £85 per Ha (£34 per acre) (€1 = 65p)
• Scots/Welsh businesses likely to suffer steeper reductions
Payment on English Lowland Arable Hectare• With full claims in reference period, 2009 net payment will be
around £225 per Ha (£90 per acre) (€1 = 85p)
• 2012 payment very similar
Post MacSharryto 1999€40 bn
Structural, inc
Direct / Coupled
Payments:Arable Area
Aid, Livestock Headage Payments
Market Support
EU-15Agri-envirnmt
Pre MacSharrypre 1993
31 bn ECU
Market Support:
Intervention, Export
Refunds, Import Duties
Structural Funds
EU-12
EVOLUTION OF THE CAPAgenda 2000
to 2004€45 bn
Mkt Support
Direct / Coupled
Payments
Rural Dev.
EU-15
Fischler2005-2012
€53 bn inc. RD
Direct
EU-25/27
Rural Dev.
Single Payment -
Decoupled:Historic or Regional Average
Mkt Support
Post Fischler2013 onwards?
€35 bn inc. RD?
EU-30?
Single Payment:
Regional Ave.
Rural Dev. Agri-env. Hill
farming, Diversification
etc.
Pil
lar
2P
illa
r 1
CONCLUSIONS / IMPLICATIONS
WHY THIS REFORM MATTERS
• Radical change in the subsidy system (decoupling)• But no great change in the amount of money received• Therefore, no great impetus for business change
Fischler Reforms (introduction of Single Payment) -
• Subsidy system largely unchanged• But substantial shift in the amount of money received
Ciolos Reforms -
SUMMARY• Single Payment at current levels time-limited• More RD money available – but more ‘cost’ involved in
accessing this• Reduction in SPS will remove profitability on many farms• To replace lost SPS, businesses can;
hope that market prices improve, or reduce costs / improve efficiency
FARM SUPPORT AFTER 2012
June 2010
RICHARD KING
UK200Agricultural GroupSpecialist Training Course
Wednesday 23 June 2010
Renewable Energy:Grasp the Opportunity
David HarriesHead of Renewables
Aaron & Partners LLP
Renewables are not new…
… and closer to home
So why is renewable energy such a hot topic?
• Climate Change• Technical Developments• Recognition of Resource• Ageing Conventional Generators• Energy Security
Existing Generation
• Coal supplied over 50% of winter consumption 2008/9• 70% of our coal imported• 50% from Russia• Average coal station over 40 years old• 6 of 19 coal stations scheduled to close by 2015• 1/3rd of UK generation to close within 10 years
Energy Security
Government Policy
• UK government targets:• 10% by renewables by 2010• 15% by 2020• 80% reduction in carbon emissions by 2050
Government Policy
• In reality, economically driven:– “3 square meals from anarchy”
• In response, Government policy has made renewable energy a good investment
The Economics
You sell your energy…
• You get paid the market price plus ROCS and LECS
• or FITS• A levy on the power generation industry• Ultimately paid for by higher consumer prices
ROCS Economics
ROCS:• “Renewables Obligation Certificates”• Base price set by government but can be traded• Targeted to encourage particular developments
ROCS Economics
What is paid for generation:• Base price currently c. £45/MWh• ROC price up to c. £50/MWh• LEC price £3.50/MWh
ROCS Economics
• Number of ROCS for:– Onshore Wind: 1
– Offshore Wind: 1.5
– Hydro-electric: 1
– Wave / Tidal: 2
– Solar Photovoltaic: 2
– Anaerobic Digestion: 2
– Landfill Gas: 0.25
ROCS Economics
– Energy from Waste with CHP: 1
– Co-firing of Biomass: 0.5
– Co-firing of Energy Crops: 1
– Co-firing of Biomass with CHP: 1
– Co-firing of Energy Crop with CHP: 1.5
– Dedicated Biomass: 1.5
– Dedicated Energy Crops: 2
– Dedicated Biomass with CHP: 2
– Dedicated Energy Crops with CHP: 2
ROCS Economics
Assuming wholesale, ROCS and LECS at up to £100/MWh:
• 1MW AD plant• at 80% efficiency • = 7,000 MW pa• = £700,000 pa
ROCS Economics
1MW wind farm• at 33% efficiency• = 2,890 MW pa• = £289,000
• 10MW = £2,890,000
Feed-in Tariffs
• Aimed at smaller generators• Maximum 5MW• Will run alongside the ROCS system• Came into force 1st April 2010• Can apply to retrospectively to schemes built
after 15 July 2009
Feed-in Tariffs
Payable in two components:• Generation Tariff according to type• Export Tariff @ 3p/kWh regardless of type
Feed-in Tariffs
• Generation Tariffs (pence / kW) for:– Hydro-electric <15 kW: 19.9
– Hydro-electric 15-100 kW: 17.8
– Hydro-electric 100kW – 2MW: 11.0
– Hydro-electric 2MW – 5MW: 4.5
• (Note: >5MW = ROCS)
Feed-in Tariffs
• Generation Tariffs (Pence / kW) cont’d:– Wind <1.5kW: 34.5
– Wind 1.5 – 15kW: 26.7
– Wind 15 – 100kW: 24.1
– Wind 100 – 500kW: 18.8
– Wind 500kW – 1.5MW: 9.4
– Wind 1.5 – 5MW: 4.5
Feed-in Tariffs
• Generation Tariffs (Pence / kW) cont’d:– Anaerobic Digestion <500kW: 11.5
– Anaerobic Digestion 500kW – 5MW: 9.0
– Solar PV retrofitted <4kW: 41.3
– Solar PV new build <4kW: 36.1
Feed-in Tariffs
• Payments linked to RPI• Income tax exempt for energy used domestically• Intended to deliver “approximate rate of return of
5 – 8% for well sited installations”
ROCS v. FITS
• FITS are fixed rate, ROCS fluctuate although fixed for period of Power Purchase Agreement
• FITS pay for energy you use yourself, ROCS do not
• From 1st April 2010, under 50kW FITS only
ROCS v. FITS
• Generally:– Small generator / self use = FITS
– Large generator + export = ROCS
FITS Bureaucracy
• Installations have to be MCS Compliant (Microgeneration Certification Scheme)
• Support is for “new” schemes• Ofgem still feeling its way and under-resourced
FITS Economics
50kW hydro-electric plant at 60% efficiency
(at 17.8p / kW base, all exported)• = 262,800 kW pa• = £54,662.40 pa• Potentially tax free!
FITS Economics
15kW wind turbine at 30% efficiency
(at 26.7p / kW base, all exported)• = 39,420 kW pa• = £11,707.74 pa
The Renewable Heat Incentive
• Due to come in 1st April 2011• Intended to incentivise renewably generated
heat• Same mechanism as FITS• Will apply to new equipment installed after 15
July 2009• Transitional arrangements to be put in place for
the time being• Anticipates 12% investment return (6% for solar
thermal)
The Renewable Heat Incentive
Eligible technologies:• Biomass• Biogas• Ground and air source heat pumps• Solar Thermal
The Renewable Heat Incentive
Proposed tarriff examples:• Biomass up to 45kW: 9p/kW, 15 years• Biogas up to 45kW: 5.5p, 10 years• Ground source heat pump up to 45kW: 7p, 23
years• Solar Thermal up to 20kW: 18p, 20 years• Ground source heat pump 350kW+: 1.5p, 20
years
More Economics
Capacity to gild the lily:• Combine with cost saving; eg. avoiding gate
fees for waste• Or with other capital projects, eg consider AD
when planning new slurry handling / storage facilities
• Combine forces: enter into partnerships to maximise resource.
• Use the energy yourself
Do you DIY?
Why not?• Lack of knowledge• Lack of cash• Lack of time• Risk of mistakes• Complexity• Scale
Do you DIY?
Why should I?• Potentially far greater return• Potential to increase prospects of success• Retention of control• Virtually guaranteed sales revenue• Potential for substantial tax savings
Tax
• Rental income = unearned income• DIY = earned income• + potential for BPR• + capital allowances on machinery• IHT – where agricultural land involved minimise
leased areas to preserve APR• Above all – don’t skimp on tax advice for large
projects
Do you DIY?
Middle ground – joint venture:• Uses developer’s cash (in whole or part)• Uses developer’s expertise• Improved returns over leasing• Should maintain tax benefits
Do you DIY?
Value of wind farm on grant of planning permission• = between £200k and £500k per MW of
approved capacity• 10MW windfarm = £2M to £5M
Do you DIY?
Do you DIY?
Contact Details
David Harries
Partner
Head of Renewable Energy
Tel 01244 405527
Mobile 07970 916517
www.aaronandpartners.com
UK200Agricultural GroupSpecialist Training Course
Wednesday 23 June 2010
FarmRenewableEnvironmentalEnergyLtd
“A local solution to a global problem”
AnaerobicDigestion
www.fre-energy.co.ukTel: 0845 8330504
The world is changing• Global warming.
• Depletion of conventional energy resources.
• Increasing world food demand.
• Reduction of fertile land.
• Financial Instability.
“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change”
- Charles Darwin
Renewable Electricity
& Heat
Other organic matter
Agitation
38° C
Biogas
Bio Fertiliser
Anaerobic Digestiona natural fermentation
process
A waste management process Cow slurry can be mixed 50:50 with food waste, harvesting the energy, reducing; Landfill, Green house gas emissions, Odour (by 80%), BOD (by 90%) and killing most pathogens. AD reduces cattle Carbon Footprint by 20%.
A renewable energy process The electrical power is available 24 hours a day - 365 days a year i.e. it is not dependent upon the wind blowing or the water flowing.
Anaerobic Digestion√
√
A nutrient recycling processThe end product (digestate) is an environmentally valuable organic fertiliser. Which will remove farm reliance upon energy hungry chemical fertilisers. 30% of the Carbon Footprint of food is down to artificial fertilisers.
√
AD ticks all the environmental boxes
‘Waste’ Materials available for AD
• The UK produces 110 million tonnes of organic waste.– 18 m tonnes food waste.– 2 m tonnes Sewage sludge.– 90 m tonnes of agricultural waste such as manure and slurry.
DEFRA-DTI-DfT (2007) AND Enviros (2008)
• This could produce approximately 5% of UK energy demand.
• The resultant material will displace energy hungry artificial fertiliser.30% of the carbon footprint of food is down to artificial fertiliser.
• 82% of the inputs are farm generated 100% of the outputs must be returned to farm land.
Animal Slurries and Crops • Medium cost, medium energy output.• Improved fertiliser value.
Just Animal Slurries• Low cost, low energy yield.• Captures methane, provides hot water, heating & power. • 22% improvement in slurry performance. • 90% reduction in BOD.
On Farm AD options
Animal slurries and food wastes• High cost, high energy output.• High nutrient value of fertiliser (will have a value in the future).• Second revenue stream. (gate fees)• Requires waste licences, permits and bio-security.
1100 m3 Digester – 350 Cows – 1000t Poultry Litter – 750t Arable
• De-gritting and gas agitation.
• 105 kW CHP (Combined Heat & Power)
• Gas Holder.
• Loading system, pump, macerator.
• Approximate Cost erected & commissioned
Cost £ 471,000 Revenue (Feed In Tarrif) £ 135,500
Running Costs £ 23,400 Profit £ 112,100 (24%)
How much does AD cost?
£ Comparison with wind power
• Wind turbine typical cost £2.5m for a power output of 2,000 kW.
Best sites achieve 35% 700 kW £ 3,570 cost/kW of delivered power
Average sites 25% 500 kW £ 5000 cost/kW of delivered power
• Anaerobic Digester typical cost £1.2m for a power output of 500 kWPlant efficiency 92% 490 kW £ 2,450 cost/kW of delivered power
Cost/kW AD less than half that of the average wind turbine.
FRE-Energy – Lodge Farm digester running for 12 Months.
Auto de-gritting – Patented Award winning technology.
Efficiency – Lowest parasitic load (80% less than continental systems)
Fibre glass roof – Not Fabric, 20 year guarantee.
Foam Alleviation system – Greater process protection.
Health and Safety – External parts, no need to work in gas space.
UK Manufacture & Support – Designed for UK agriculture.
FRE-Energy USP’s
FRE-Energy – ADG systemSmart Award wining patented technology
• As dry matter digests inorganic matter sinks to the bottom of the digester gradually filling it up, reducing digester capacity.
• De-gritting removes the limitations on material for digestion. i.e. you can still bed on sand or ash.
• You can digest root crops e.g. Potatoes, fodder beat.
• You can digest high grit mucks e.g. Chicken litter.
3 Years Ash Bedding
• Energy used to run the process, is lost.
• TOTAL parasitic load for an 1,100m³ gas agitated digester = 2kW approx 1.9W/m³ of digester. (excluding loading and unloading)
• For propeller or jet mixed systems this is generally 15W/m³.
• For an 1,100 m³ digester this is 2kW verses 16.5 kW. Amounting to (14.5 x 24 x 365) 127,000 kWhr per year.
• At 7 pence / kWhr = £9,000 a year.
Minimal Parasitic Load
• There is no need to enter the gas space or break the gas seal to maintain any FRE-Energy digester parts.
• Gas pumps are duplicated and external to the digester.
• De-gritting arm is suspended from the digester roof with external bearings.
All Serviceable Parts are external to the digester
Health and Safety
Benefits to Farming• The nutrients in Digestate are in a far more available
form. There is between 20 & 25% better nutrient uptake. Improvement in fertiliser value for 350 Cattle - £7,700pa
• The AD process kills weed seeds and pathogens e.g: Foot & mouth. TB. Salmonella. Coliform Bacteria. … dna
• The Process reduces odour by 80% and BOD by 90%
• Digestate does not taint grass eliminating rejection by grazing animals.
• Digestate from AD with added food / imported waste has far greater fertiliser value than straight slurry.
• In the last 18 months, only 6 digesters have been commissioned in the UK and we are still sending food waste to landfill.
• The UK target is to build 1,000 by 2020.
• In the last 5 years Germany has built 5,000 AD plants producing renewable energy equivalent to one nuclear power station.
• To meet our target we will have to start building systems, instead of doing pilot studies and commissioning reports.
How is the UK performing?
Why so few AD plants?
• The government is focused on single ‘big fixes’ i.e. Nuclear Power & Large off-shore wind farms.
• Lack of joined up thinking from the regulators- they look at problems in isolation.
• Historically, we have had North Sea Oil & Gas giving low energy costs and a high level of energy security.
Only a handful of Anaerobic Digesters in the UK due to a lack of effective government support and the blinkered approach of planners and regulators.
Politicians.• Are vocal in their support of AD, however the
message is not getting through to the administrators.
Planners. • Currently view AD as an industrial process best
suited to industrial estates and not rural locations.
Power companies. • Are keen to encourage renewable generation but
make it very difficult and expensive to connect to the national grid. – (Turkeys voting for Christmas).
AD versus the three P’s
Final comment We'll be up to our necks in water,
fireballs and hurricanes will rage across the sky, but there'll still be men in suits telling us we've filled the form in incorrectly.
Unfortunately, like cockroaches, I fear they will be the ones to survive climate change!
FarmRenewableEnvironmentalEnergyLtd
“A local solution to a global problem”
AnaerobicDigestion
www.fre-energy.co.ukTel: 0845 8330504
Future generations will look back at the 20th century with embarrassment.
The energy resource of 150 million years of planetary evolution has been squandered in a little over 100 years.
It is our responsibility to embrace renewable energy solutions sooner rather than later.
Carbon will become the currency of the 21st Centaury
In the post oil age, agriculture will play a key role in both feeding and powering the planet.
The answers to the problems lie in a multitude of localised solutions; there is no single big fix.
The swear words of the next generation will be: ‘Globalisation & Centralisation’
FarmRenewableEnvironmentalEnergyLtd
“A local solution to a global problem”
AnaerobicDigestion
www.fre-energy.co.ukTel: 0845 8330504
UK200Agricultural GroupSpecialist Training Course
Wednesday 23 June 2010
A BRISK CANTER THROUGH CAPITAL TAX
DEVELOPMENTS FOR MIXED AGRICULTURAL
ESTATESby
Adrian Baird
CLA Chief Taxation Adviser
(1) Scope
• IHT reliefs APR & BPR– but mainly APR
• Within IHT APR– mainly on occupation – new IHTM and
Case Law have clarified much of the definition of agricultural property
• The continued importance of APR for CGT hold-over relief
• Surrender and re-grants & CGT
(2) New horizons
APR
A perceived narrowing of the scope
= less important?
BPR
A judicial widening of opportunities
= more important?
(3) Recent APR case law
• The ‘definitional’ problem– Starke
• Indicia of character appropriateness– Dixon, Higginson, Antrobus 1 (and
via Antrobus 1 to Korner)
• The problem of the predicate– Rosser 1 (& Williams)
• What is a farmhouse?– Arnander
(4) What APR case law can do
• Tell us how to judge whether a house is a farmhouse
• Tell us what is the predicate of the character test
• Tell us what factors (indicia) may suggest a farmhouse is of an appropriate character
(5) What APR case law can’t do
• When does agricultural property satisfies the ‘occupation test’ in the common, borderline cases– Eg., where the farmer is absent, or
in ill-health or quasi-retired
(6) Recent BPR case law
You never had it so good…
• BPR can apply to the transfer of assets comprised in a business – the ‘loss to donor’– Nelson Dance
• Not wholly or mainly holding or making investments– Farmer, George
(7) Recent BPR case law
Just perhaps it was too good…
• Although active involvement not required for BPR this may lead to the holding of investments– McCall
• What comes first – the ‘business’ or ‘excluded property’?– Brander
(8) APR is still important
• APR applies to farmhouses– Brave or stupid? 9th Marquees of
Hertford
• The extent of BPR on investment property may be curtailed– Brander may answer this & McCall
has already made cautions
• APR status helps CGT– the ‘agricultural extension’ to
hold-over relief (now apt for FHL)
(9) APR: The basic structure
APR takes priority over BPR and applies to• property• in UK, Channel Islands & Isle of Man, and (22
April 2009) property in EEA states• @ 50% or 100%• on that part “…of the value transferred by a
transfer of value [that] is attributable to the agricultural value of agricultural property…”
• if, but only if, the occupation test is satisfied.APR is given before exemptions & grossing up
(10) The occupation test
Throughout the period immediately before the transferthe agricultural property must be
occupied for the purposes of agriculture
2 years 7years
by transferor
by any person
transferor must own property
(11) The two prerequisites of IHT APR
OCCUPATION
Someone must be in occupation of agricultural property (the principal definition of which is agricultural land)
AGRICULTURE
Agriculture must be the purpose of the occupation
(12) Definition of agriculture?
APR property = (primarily) ‘…occupation of agricultural land for purposes of agriculture…
WHAT IS AGRICULTURE? IT INCLUDES
• Breeding and rearing of horses (+ grazing of same) on a stud farm
• Short rotation coppicing (only if in UK)
IHTA 1984 ss 115(4) & 117 & FA 2005 s 154
(13) Definition of agriculture?
‘Agriculture’ is not further defined
Where land is used for arable or pastoral farming then it will be used for agriculture
IHTM 24062
(14) Farming as a trade
• All farming or market gardening conducted within the UK is treated as a trade for IT & CT– All UK farming conducted by same person is a
single trade– Farming conducted by a partnership is
separate from farming conducted by individual partners
ITTOIA 2005 s 9(1) & CTA 2009 s 36(1)
(15) Definition of farming?
• Farming = ‘…occupation of land wholly or mainly for purposes of husbandry…’
• EXCLUDE market gardening
• INCLUDE– Hop growing– Breeding and rearing of horses (+
grazing of same)– Short rotation coppicing (only if in
UK)ITA 2007 s 996
& CTA 2009 s 1317
(16) The two prerequisites of farming
OCCUPATION
For a person to be farming they must be in occupation of land that is not market garden land
HUSBANDRY
Husbandry must be the main purpose of the occupation
(17) An interim conclusion
IF land is occupied for husbandry
THEN the land will satisfy the APR occupation test
(18) Husbandry
• Husbandry = every industry conducted by a husbandsman
• Husbandsman = someone who tills or cultivates the soil.
(19) Husbandry & case law
• Cavan (Industrial & Provident society) bought in milk from members.
• Cavan separated out cream, churned it into butter and then sold the butter
• The buttermilk and skimmed milk returned to members
• Is this husbandry?Cavan Central Co-operative Agriculture and
Dairy Society Ltd [1917] 12 TC 1
(20) Husbandry: Cavan case
• Husbandry = every industry conducted by a husbandsman = someone who tilled the soil. – but may also include an activity conducted on land
whose ‘…manifest object [is] the benefit of mankind and the support of life...’
• Thomas Tusser’s 500 Points of Good Husbandry (originally published 1557) remains valuable.
• Many acts of husbandry have ceased to be so because ‘ under different social and economic conditions…’ they are no longer performed by husbandsmen
(21) Key point
• ‘husbandry’ is a word of very wide meaning
• limitation is that the husbandry activity has to be carried on by someone who tills or cultivates (ie, performs an activity upon) the soil
(22) Consequences
Activities normally performed by a husbandsman can be husbandry and may thereby be agriculture. Examples:
• Short-rotation coppice
• Growing biomass crops
(23) APR Consequences
This explanation is consistent with IHTM 24061
• which links ‘agriculture’ first to the production of food and the tending of livestock; but then
• extends ‘agriculture’ to the sort of activities that an occupier of land using it for food production, &c., would additionally perform
(24) Husbandry and Agriculture: similarities
Agriculture is based in food production but extended to include other activities performed by a cultivator of land
NB: does this explain Wheatley [1998] STC(SCD) 60? Ie., the non-farm horses are not held by cultivators of the land…?
(25) The meaning of ‘occupation’
• Long correspondence between CLA and IR on meaning in relation to share farming
• IR initially contended that only the share operator (& not the landowner) could be in occupation of the land & thereby farming the land
(26) One or more occupiers?
Dawson v CounsellOnly one occupier • (normally) person with
exclusive possession• (exceptionally)
paramount occupier = person with paramount use at the requisite time
[1938] 22 TC 149
Back v DanielsMay be more than one occupier where two or more persons have simultaneous paramount use.
[1924] 9 TC 183
(27) More than one occupier
• After receiving a Counsel’s opinion, IR agree more than one occupier possible
• The power to exclude others ‘persuasive’ but NOT essential
BIM 55055
• Person who farms is in occupation meaning of ‘farming’ imported into APR
IHTM 24072 & 24083
(28) More than one occupier
The 1991 agreement now in BIM 55055
The power to exclude others ‘persuasive’ but NOT essential
(29) An occupier of land
For a person to be an occupier of land:• the person must perform some activity in the
capacity as user of the land; AND• The person must have a degree of permanent
physical presence or possession– but, by analogy to tenant of house under Rent Act,
this need not be continuous presence or possession (see Ticker v Hearn [1960] 1 WLR 406)
(30) Occupation and old case law
FORSYTH-GRANTGrassland can be occupied by the owner and be subject to seasonal agreements provided the owner performs acts of husbandry commensurate with growing the grass as a crop.
[1943] 25 TC 369
RATIO• Landowner was
performing some activity– as user– with degree of permanent
physical presence and possession
• The activity performed was husbandry
NB: Court conflate ‘husbandry’ and ‘agriculture’
(31) Extending occupation
IHTM 24072• Partnership in occupation
each partner in occupation• Company in occupation
controlling shareholder in occupation
• Beneficiary with qualifying interest in possession is in occupation
(32) Atkinson & occupation
• Partnership occupied farm under tenancy to individual partners
• Senior partner occupied bungalow
HELD: Partnership occupation of farm sufficient to satisfy s 117(b) even though senior partner may not satisfy s 117(a)
NB: Subject to appeal
(33) Implications for elderly, &c.
• The occupation test applies throughout period immediately before transfer
• The transferor will often be elderly and/or unwell
(34) Implications for elderly, &c.
‘…a temporary cessation of activity..’ may not prevent relief provided farmhouse remains ‘…functionally attached to the farm…’
But a need to be objective in assessing illness
(35) Post mortem
Watch out for
• Death Certificates stating ‘Retired’
• Lack of records on the deceased’s level of activity…
• …or records that show it was minimal!
(36) Post mortem
• Can you supply extensive and detailed analysis of the activities actually performed?
• Remember question on the land may be directed to the predicate of the character test
• If reliance placed upon s117(b) then no BPR
(37) Residential care
If landowner goes into residential care then– ASSESS the likelihood of return
realistically– THEN consider whether younger
generation should move into the house quickly
(38) Survivors
Common scenario of surviving widow
• ASSESS whether performing an activity on the land (NB bookkeeping is not such an activity….)
• THEN consider how the family might relocate the survivor (if need be)
(39) The paradox of non-occupation
Where the farmhouse is NOT occupied
• ASSESS whether family members can use the house as a functional farmhouse
• NB: they do not have to ‘move in’ but the elderly/infirm owner may have to ‘move out’
(40) The real message of McCall?
Do NOT delay making transfers of property that may soon not qualify for either APR or BPR.
(41 NB) IHT clawback on lifetime gifts
PETS
Clawback operates to withdraw relief and affect cumulative total
Chargeable transfers
Clawback operates for purpose of additional tax and does not affect cumulative total if within NRB @ death
(41) The ‘right’ strategy
• Is additional tax likely?– If unlikely gift into settlement
• Reliefs locked in & clawbacks unlikely• CGT hold-over under s 260• Relevant property regime may be
comparatively benign
– If likely then CGT becomes a factor for a PET
• This is the key area where the CGT hol-over relief ‘agricultural extension’ may help
(42) And finally…
Griffiths [2008] STC 776
Make gifts void where:• donor was acting under a
mistake of ‘true facts’ (eg., having undiagnosed terminal cancer)
• donor would have acted differently if true facts were known
(43) Specific hold-over & use
Under specific hold-over relief the asset must be in trade, &c., USE at time of disposal
But does this mean the whole asset has to be so used?
TCGA 1992 s 165(2)(a)CG 66950
(44) the 2 apportionment hold-over relief rules1. (General rule) where any asset has
not been wholly used during ownership (includes pre 31iii82 periods)
2. (Specific rule) where a building or structure not used for any substantial part of ownership
(45) The value of the ‘agricultural extension’
Apportionments do not apply to where the ‘agricultural extension’ operates
– not in trade use– Comprises agricultural property qualifying for
APR
important implications for part disposals and for use of alternative basis and for whether gift is made as PET or not!
(46) Let (residential) property
The ‘agricultural extension’ and its implications for apportionments are important where let, non-agricultural property (eg., residential property) is gifted as a PART-DISPOSAL of an asset.Where the part-disposal includes let agricultural property the consequences are significant.
(47/48/49) Example of hold-over
Farm own as one asset since 1970 includes
• cottage occupied by farm worker until 1975, then ASTs to be gifted to son in 2010
• 250 acres let farmland• outbuildings in non-ag.
use (but trade use) after 1975
• Gift is PET TCGA 1992 s260 does not apply
• If cottage gifted alone then no s165 relief (non in use at time of gift)
• Disposal with outbuildings & strict basis apportion gains to cottage then to pre and post 1975 ownership periods one-eighth (5/40 years) deferral possible
(50/51/52): Example of hold-over cont’d
Farm own as one asset since 1970 includes
• cottage occupied by farm worker until 1975, then ASTs to be gifted to son in 2010
• 250 acres let farmland• outbuildings in non-ag.
use (but trade use) after 1975
• Disposal with 20 acres of farmland & strict basis reduction for IHT APR would be made if it were a chargeable transfer whole gain on cottage qualifies for deferral
• If alternative basis used then consider re-establishing APR on cottage
• NB no PPR restriction
(53) Surrenders and re-grants
Possible to effect an express surrender and re-grant of 1986 Act agricultural tenancy so that re-grant still governed by 1986 Act
Agriculture Act 1995 s 4(1)(g)
(54) CGT implications for tenant?
Does tenant’s surrender (disposal) give rise to a significant capital gain?
(55) Possible answers?
ESC D39
Certain extensions to leases not a disposal
BUT: HMRC state
re-grant not an extension
Sargaison
Is it a part-disposal which is for nil consideration
(via CGT 70774)
BUT: HMRC state
re-grant not a
part-disposal
(56) HMRC’s view?
Value of surrendered tenancy = value of re-grant
Re-grant does not have significant value (Walton)
THANK YOU FOR YOUR ATTENTION
Adrian Baird
UK200Agricultural GroupSpecialist Training Course
Wednesday 23 June 2010
Gruesome Tales from the Countryside
Midsomer Murders? - Gruesome Tales from the Countryside
Simon Morgan – Fellow of the Agricultural Law Association – Bright & Sons, Witham, Essex – 01376 512338
Wills and Lasting Powers of Attorney
Gruesome Tales from the Countryside
Adverse Possession
Continuous user as of right for 12 years – un-registered land - 10 years for registered land
Section 31(6) Highways Act 1980
Map and Statement valid for 10 years
Village Greens
Significant number of locals using an area for sports or past times – 20 year’s use as of right – no 31(6) remedy
Gruesome Tales from the Countryside
McKaskie v Cameron (2009)
Risk AssessmentTake advice
Gruesome Tales from the Countryside
Criminal Justice and Public Order Act 1994
Sections 61 and 62A
Animal Welfare Act 2006
Cross Compliance Default
2006 2007 2008
Cattle Identification
1419 1213 1286
Sheep and Goat Identification
72 178 218
Animal Welfare
N/A 143 204
The End
UK200Agricultural GroupSpecialist Training Course
Wednesday 23 June 2010
UK200Group Agriculture23rd June 2010
James O’Mahony
Head of Agribusiness
Reasons to be Cheerful?
• The Strength of UK Agriculture’s Balance Sheet (2005 in brackets)
• Total Assets £215bn (£141bn)
• Bank Borrowing £12bn (£8.5bn)
• Other Borrowing £4bn (£2.5bn)
• Gearing 7.5% (7.8%)
• Source: DEFRA/Bank of England
The P&L Account
• Sector by Sector
• Wide range of performance in each sector.• Some common trends• Scale / Size
• Profitability as a prime driver of business?
• Impact of non – agricultural incomes
• New income Generating opportunities
What has changed?
• Permanent
• Need to price for risk• Cash flow focus- requirement for customer ownership• Better business management• Business Banking is not just order taking – a partnership as trusted adviser
• Temporary ( maybe )
• Increased Cost of Funds ( Libor, deposit rates and cost of capital )• Market Liquidity• Increase in difficulty in debt servicing and repayment (for some)• Effects of global recession
• Different Banks are in different positions and have different lending and pricing policy responses from each other and from the past .
• Capital management , risk appetite , reward , terms & conditions have changed ( substantially in some cases ).
• Changes in team structures for some lenders.
• Fewer Players in the Market (will they return?)
What has changed? (2)
What are we looking for?
• C – character
• A – ability
• M – Means
• P – Purpose
• A – Amount
• R – Repayment
• I – Insurance
What are we looking for?
• Especially in relation to Renewable Energy Opportunities
• What will you need – the basics
• What are you looking to do?
• Why do you want to do it?
• Have you written a business plan• Professionals involved• Costs• Cashflow / Payback• Consents• Grants• Sensitivity
• What is the impact on the existing business• DO NOT TAKE YOUR EYE OFF CORE BUSINESS
• Indicative fixed rates available
• ( Based on £2,000,000, Capital & Interest Fully Amortising loan with 1/4ly Repayments EXCLUDING bank lending margin)
• 5 yr Fixed Rate 2.60%• 10 yr Fixed rate 3.40% • 15 yr Fixed Rate 3.70%• 20 yr Fixed Rate 3.75%
• 3 month LIBOR 0.73%
Managing Risk - Interest Rate Protection?
Opportunities
• Historically low interest rates
• Good time to invest and borrow
• Industry prospects stable
• Favourable exchange rate
• Risk can be reduced by hedging
• Strong land prices (security)
Key Messages
• Capital should not be a constraint for most sound established farms.
• UK Agriculture has exceptionally strong balance sheet and excellent bad debt record (low!)
• Apply sensible and realistic sensitivities to your plans.
• Make sure you communicate with your bank and at all stages
• Sound, well thought out funding requests should achieve bank funding.
• INVOLVE US EARLY!!!