Scottish Entitlements – simple summary and background – January 2020

On 1^st January 2015, the Basic Payment Scheme (BPS) replaced the Single Farm Payment in Scotland, following the reform of the Common Agricultural Policy by the EU. As we are now leaving the EU, the new UK government has pledged to maintain the same level of agricultural funding throughout the current Parliament, albeit reducing direct payments and moving to a system that gives “public money for public good”, as currently set out in the Agriculture Bill. An additional factor concerns the Scottish Government which has stated they wish to introduce their own Agriculture Bill for Scotland rather than be included with the rest of the UK.

When the BPS was introduced all existing entitlements in Scotland were reallocated as new BPS entitlements to eligible farmers who applied in 2015. This allowed the Scottish Government to redefine all land types and assign different values for each region.

 

Regionalisation

Funding is allocated on an area basis and the land is classified into different Regions to reflect the variation in land quality across Scotland, with each Region attracting different payment rates. The three Region types of are:

• Region 1 (better quality agricultural land),
• Region 2 (rough grazing with a Less Favoured Areas grazing category of B, C or D)
• Region 3 (LFA land with a grazing category of A).

The ‘Less Favoured Area’ term is used to describe an area with natural handicaps like being mountainous or having a short crop season. The grazing categories  of A, B, C and D were allocated as a means of reflecting land quality based on stocking densities calculated using eligible land and the agricultural activity of the business. ‘A’ is less dense whilst ‘D’ is more so.

The value of each entitlement is made up of a combination of the Basic Payment and a Greening payment working out at approximately 30% of the total value of the Basic Payment. Since 2015 the ‘historic’ value of an entitlement has gradually transitioned to a Flat Rate payment so that as of 2019 all claimants in each Region were paid the same per hectare.

The Greening Payment was introduced as a means to reward the environmental performance of farming. This payment ‘for agricultural practices beneficial for the climate and environment’ is paid on top of the BPS payment and includes; protecting permanent grassland designated as environmentally sensitive grassland, growing a minimum number of crops and farming five per cent of your arable area in a manner that promotes biodiversity – known as an Ecological Focus Area (EFA).

 

Claiming BPS & Greening

To claim you can use the Single Application Form (SAF) and must be; at least 16 years old, have management control/ at your disposal at least 3 hectares of eligible land (and have the appropriate number of the correct Regional entitlements) and meet cross compliance conditions on all land declared in the form for the whole of the claim year. To continue to be paid each year, you must complete a SAF annually declaring your eligible land, comply with the greening rules and eligibility requirements, and continue to hold the appropriate entitlements. The SAF must be received by 15th May. From 2015 the usage rule changed and farmers must now use all their entitlements in a single application at least once every two years, otherwise the unused entitlements will be lost to the National Reserve.

From 2018 onwards the active farmer rules were relaxed in Scotland in that the “negative list” was removed and therefore non-farming businesses that met other criteria can now claim. However you must still be classed as actively farming your land by carrying out ‘agricultural activity’.

 

New / Young Farmers and the National Reserve

The National Reserve is a notional “pool of money” taken from the total funds available for the Basic Payment Scheme in Scotland. It is used to allocate payment entitlements, as a priority, to Young Farmers and New Entrants to farming who do not already hold BPS entitlements.

From 2016 onwards, the only route to new entitlement allocations other than purchasing from the open market is via the National Reserve. The two categories you can apply under are:

• New Entrant – if you started an agricultural activity in 2013 or later and did not undertake activity in your own name or at your own risk in the 5 years preceding the start of the activity.
• Young Farmer – if you are less than 41 years of age on 31 December of the year you apply for an award and are setting up for the first time an agricultural holding as head of the holding.

A Young Farmer must be setting up for the first time as head of the holding or have control of a partnership/legal person (e.g., limited company) in the five years before submitting their first application for Basic Payment Scheme. This could be setting up a new business or taking over an existing business.

A New Entrant must not have carried out any agricultural activity in their own name or at their own risk in the five years before the start of the current farming activity. You must submit a BPS application no later than two years after starting. This means that if your business started in 2018, the last year in which you can apply to the National Reserve is 2020.

There is no separate paper application form for National Reserve entitlements; to submit an application to the National Reserve you must complete your SAF, and the application is contained within the SAF. If you meet the criteria set out above, you will be allocated entitlements to match any shortfall required to match the land region and area claimed.

 

Young Farmer Payment

Young Farmers are also eligible to receive a Young Farmer Payment. This is a top up payment on a maximum of 90 eligible hectares, and the rate paid is 25% of the average value of the Basic Payment element of the claim for the scheme year concerned.  Once a Young Farmer claims for the Young Farmer payment they can continue to claim for this additional payment for a total of 5 years from the first application. They can also only claim for this in the 5 years following the date they took control of the business.

The payment must be continually claimed for in each of the 5 years, and checks will be undertaken to ensure that the business remains eligible for payment. You can apply for the Young Farmer payment on the SAF, where you will be asked to provide evidence of your eligibility.

 

Trading

The transfer period for Scottish entitlements occurs between 16th May and 2nd April or next working day. If entitlements are to be transferred in time to claim for the Basic Payment Scheme, a paper PF23 form – Application to transfer entitlements form, must be sent to the seller’s Entitlement Transfer Unit by 2nd April. The addresses of these are located on the PF23 form and each one covers a specific area. There is no online application process at the time of writing.

Under EU regulations governing the Basic Payment Scheme, entitlements are transferable to other farmers with land of the same region at their disposal. Scottish entitlements therefore are only tradeable between farmers with land at their disposal within Scotland. You can transfer your entitlements with or without land as a gift or inheritance, sell your entitlements, or lease them for a specific period (after which at the end of the lease they will be returned to you). The person or business that will take over your entitlements must meet the definition of a ‘farmer’ as determined by the European Regulations at the time of transfer. As of 2018, this meant that a claimant would have to be carrying out a minimum level of agricultural activity on their land. In Region 1 this would be growing and harvesting crops, rearing and breeding livestock and actively maintaining it in a suitable state for grazing or cultivation. Region 2 and 3 need to meet the minimum stocking requirements (usually 0.05 livestock units per hectare for at least 183 days each year), or carrying out an annual Environmental Assessment across the holding or a combination of the two.

The Region type and number of entitlements being transferred, and whether the transfer is with or without land, must be set out on the form, along with (if being transferred with land) details of the land being transferred. If the transfer is with land, a copy of the land transfer agreement should also be included with the PF23, plus confirmation of the date of entry is required and the land must transfer on the same day as the entitlements. The PF-23 form must be signed by both parties.

VAT is payable on all entitlements traded without land, unless the seller/lessor is non-VAT registered. There is no VAT charged on a trade that includes land unless the vendor has registered the land for VAT. Most entitlements are traded without land so are eligible for VAT as long as the vendor is VAT registered. If the purchaser is not registered they should ask the agent if any vendors are non-VAT registered as then the 20% saving can sometimes be split between the two parties.

For 2018, entitlements transferred without land had a 30% ‘siphon’ applied to the value of the Basic Payment element, reducing the value of the entitlements (although never reducing them below the Flat Rate). This went to the National Reserve providing additional funds for other farmers. According to the Scottish Rural Payments & Inspectorate Division (RPID) a siphon will continue to exist for 2019/2020, but a subsequent adjustment done before claims are paid returns the value of the Entitlement to the appropriate Regional Flat Rate, in effect cancelling it out beyond 2019/2020.

 

Comparison of how the entitlement value has changed since 2015

Previously entitlements were calculated using historical value, in 2015 they would have differed from business to business. To make this fairer, convergence was introduced so each claimant would be paid the same entitlement value for a specific region by 2019. The average value of each region has changed, with the flat rate increasing by 20% per year and the historic value decreasing by 20% from 2015 until they were all based on a flat rate in 2019. This affected the average value claimed for each entitlement from each region, shown below.

Average entitlement value (inc. greening but before FDM) for each region during the convergence period (2019 being the flat rate with no historic element):

Year	Region 1 £/ha	Region 2 £/ha	Region 3 £/ha
2015	173.48	52.19	24.89
2016	184.01	47.36	21.88
2017	194.54	42.53	17.66
2018	205. 07	37.70	14.04
2019	217.73	43.13	12.90

 

Market value

The value of an entitlement when traded differs from the annual payment it will attract, as it depends on the supply and demand in the market.

In 2016 trading was slow initially, with historic entitlement values unknown and a 50% siphon in the value of the Basic Payment element of the entitlement when transferred without land resulted in most transfers taking place in conjunction with land. Entitlement transfers showed multipliers of 1.2 to 1.5 times of the average predicted annual payment value, as there were at least four more years of claims.

Trading in 2017 was much more active despite the siphon still being 50%. The supply of entitlements was greater than demand with an average multiplier of 1.25. Due to the convergence towards a flat rate, entitlements that had a historically low value were now increasing in value to the national average.

The reduction of the siphon to 30% in 2018 for transfers without land, plus the effects of convergence, saw an increase in the number of entitlements bought and sold. Region 1 entitlements started in January with a multiplier of 0.86 times face value, before rising as high as a 1.59, and ended up averaging a 1.3 multiplier. Region 2 entitlements started trading with a multiplier of 0.98 face value, before it rose the following week to as high as 1.45. Prices remained at this level until the final week when sales were being agreed at multipliers of around 1.4 times face value, and with the final deal of the season being agreed at 1.3 times face value. Region 3 had a very low payment value and when combined with siphon only the largest of landowners would have made a decent return on their investment.

For the first time, trading in 2019 saw all entitlements valued at the same Flat Rate within their respective regions. Demand was particularly strong for Region 1 and 2 with almost double the number of entitlements traded year on year. Whilst there was a notional siphon of 30% on transfers without land, the RPID announced that all entitlements would converge to a Flat Rate before the 2019 BPS payment run, in effect cancelling this out.

For 2020 Region 1 saw high levels of fluctuation with lots traded at £160 -£200 plus VAT whilst Region 2 averaged  £45 plus VAT. Region 3 was in high demand this season, however the price was high compared to face value affecting the number of deals.

BPS Transition

Scotland diverges the most from other regions. They can potentially retain a direct payment system after the rest of the UK moves to new schemes.  The Agriculture (Retained EU Law and Data) (Scotland) Act 2020 creates powers that enable Scottish Ministers to ensure the Common Agricultural Policy (CAP) can continue in Scotland beyond this year. They also retain the ability to make improvements to the scheme following Brexit.

• Farm support is expected to largely remain the same in Scotland until at least 2024.
• SGRPID have confirmed there will be no ‘three crop rule’ as part of the Greening Payment
• Rules for permanent grassland and ecological focus areas under cross compliance must still be followed.