Rural sector update: Agricultural subsidies and preparing for an uncertain future

Harrison Drury’s Lucy Beachell from the rural sector team provides an overview on the phasing out of the Basic Payment Scheme and the implications to agricultural businesses.

What do we know about current subsidies for the rural sector?

At this stage all that is known is that the Basic Payment Scheme (BPS) will be phased out between 2021 and 2027, with as expected, the biggest earners taking the biggest hit.

The implications to agricultural businesses of the scheme being phased out are stark and quite worrying when coupled with the repercussions of Brexit and more recently the long-term impact of coronavirus COVID-19.

A working example of how different levels of payment will be impacted is set out in the table below:

Can other government subsidies be utilised to make up the shortfall?

Yes, they can, but only if you act quickly. The Countryside Stewardship Scheme (CSS) is still open to applications and the government has agreed to continue funding these schemes provided they are agreed and signed before 2021.

These schemes can, in some circumstances, be quite lucrative. However, they also have strict conditions to abide by which can impact the farming system for the land in question. The trade-off with the conditions imposed, is that they provide some financial certainty for the future and can be implemented in conjunction with the BPS to supplement farm or estate income whilst it remains unclear what will replace the BPS.

Is there any news of a replacement for BPS?

There is limited information on future schemes and certainly not enough to enable stakeholders to formulate business plans and project their income in the future. However, the latest acronym is ELMS, further details on which are set out below.

The Agriculture Bill is the biggest piece of agriculture specific legislation since the Agriculture Act 1947 and is far too big a topic to elaborate on in a single blog, but it is the mechanism by which the new Environmental Land Management Scheme (ELMS) will be implemented, amongst other matters.

The ELMS is due to be rolled out by the end of 2024 during the phasing out of the BPS. The general theme that ELMS will follow is ‘public money for public goods’.

In essence, farmers and landowners will be paid for carrying out works for the benefit of the environment. From what we know up to now, this seems to closely resemble the current CSS. This is a far cry from the BPS which entitles landowners and farmers to receive payments for very little in return.

A helpful update on ELMS was published by the government in February 2020.

Are changes required to tenancy agreements?

At present, we cannot, be sure but the updates refer to tenancy reform in order to ensure the framework for tenancies, whether governed by the AHA 1986 or ATA 1995, is amended to enable all tenants to participate.

However, there is a clear risk of conflict as efficient, profitable farming production often does not go hand-in-hand with the wellbeing of the environment.

As with all business planning, preparation and transparency is key. Many tenancies governed by the ATA 1995 prohibit the tenant entering into agri-environment schemes without the consent of the landlord.

The likelihood is that this will remain the position with the ELMS. The overwhelming likelihood is that if a tenant did not seek legal advice when signing their tenancy agreement, this will be the position in a precedent tenancy.

The consideration of a deed of variation

If a Tenancy prohibits entering into agri-environment schemes, it may necessitate a deed of variation being entered into to afford tenants maximum flexibility in the future to take advantage of the CSS, ELMS and other capital grants.

Clearly, this is subject to a landlord agreeing to the variation. Opening up relevant dialogue sooner rather than later is important and highly recommended.

Some tenancies expressly reserve a right to the landlord to enter the property into agri-environment schemes. This can be catastrophic for a tenant’s business given the significant changes proposed for the future. Potentially, this could also mean some tenants are already in breach of their tenancies as a result of entering the demised land into an agri-environment scheme without checking their tenancy agreement.

In addition, this could deprive a tenant of significant income/government support whilst also resulting in their farming practices being restricted to ensure compliance with the terms of their tenancy.

Future predictions for UK agriculture

The introduction of the ELMS will bring with it obvious conflicts of interest between landlord and tenant as well as opportunities. Landlords with productive arable land may prefer their tenants not to enter these schemes as they will likely prohibit the most efficient, productive and profitable (but most intensive) farming practices.

This is because the ELMS may impact on the capital value of the landlord’s asset if it is tied up for, say, ten years in the scheme. However, landlords with marginal land which struggles to turn a profit are likely to actively encourage taking up the ELMS to ensure their tenants can continue to pay rent.

We may even see an increase in the value of marginal unproductive land due to how well-suited it is to the ELMS and more landlords wanting such land back so they can receive the monies from the scheme.

It is common knowledge that the Basic Payment Scheme has resulted in, together with IHT reliefs, increased land values over the years since its introduction.

Looking again at the table above, it is abundantly clear that there is going to have to be conversations between landlords and tenants with regards to rent. Current rents are, despite many professionals saying otherwise, based, in part, upon the value of the BPS to the tenant.

With BPS dropping off dramatically in the future, tenants are going to have to take a proactive approach and utilise the ELMS, or the CSS in the interim, to make up the shortfall. Alternatively, they are going to have to have frank conversations with their landlord.

How can Harrison Drury help agricultural businesses prepare for the future?

Our fixed fee service to review Agricultural Tenancy Agreements, for both landlords and tenants, can help make it possible for rural businesses to prepare for the future.

The service is offered as a fixed fee of £250 plus VAT and disbursements (if any) per agreement and will provide answers to the following:

• Does your tenancy restrict your/your tenant’s ability to enter into agri-environment schemes.
• Are you/your tenants already inadvertently in breach of your/their tenancy.
• What steps can be taken to remedy the breach, if any.
• Alternatively, whether a breach can be utilised to bring the tenancy to an end.
• What are the potential implications if any issues are identified but not addressed.

To review your Agricultural Tenancy Agreement or for general advice and information regarding landlord and tenant agreements please contact Harrison Drury’s rural sector team on 01772 258321.