Life after the Basic Payment - the impact on farm owners

The Agriculture Bill states that whilst the Basic Payment receipts continue unchanged for 2019, these direct support payments will cease from 2027.

The impact this will have will vary on a farmer-by-farmer basis. According to Defra, the ‘average’ cereal producer had an income (net of expenses) in 2017/18 of £64,200. Of this, the Basic Payment accounted for £44,000. Diversified income accounted for a further £18,600, leaving just £1,600 generated from agriculture itself. Many farms are going to really struggle when the full impact of the phasing-out of the Basic Payment occurs.

So what should farmers do about the situation? A ‘wait and see’ approach – carrying on as normal and waiting to see what happens – is unlikely to produce a positive outcome. Farm owners should consider all aspects of their business to see how they can make changes.

Employees are a key area as wages form a significant proportion of the costs that farmers incur. The factors to consider here are wide-ranging and every farm will be different. Some farms have had the same workforce for many years and are having to make tough decisions. Redundancies may be required where staff are employed in areas of the business that are loss-making, with little expectation of future profits. It is not an easy decision when staff have been employed for a long time and are living in a farmer’s property. Farm owners need to consider whether the farm has the optimal number of staff, whether they are making best use of their staff, whether they would cope with fewer members of staff or doing away with more expensive overtime, and whether there are sub-contractors available to help if they did reduce the workforce.

Farmers also need to consider the goods that they are producing. Do they generate a profit? Could the goods be produced more efficiently? What different goods could they produce?

Who they are selling to is another consideration. Could they get a better deal by selling elsewhere? Could they sell directly to the public?

Could they cash-in from the assets they own? Could they sell any pockets of land that are not productive or not key to the future of the business? Could they sell their combine harvester, their tractors, their machinery… and hire these assets instead? This would give a one-off cash boost, albeit this would not give a long-term solution to the problem. Could they make use of the current low borrowing costs to develop farm buildings and therefore generate income from assets that are currently not generating an income, for storage or for a wedding/conference venue perhaps?

Diversification is playing an increasingly important role for farms. Are they making the most from the land that they own, the location they are in, the skills that they -and their staff - have? Could they develop a niche market, create a brand and generate a new income stream?

Cost savings need to be made. Staffing has already been mentioned, but farms need to look at all the expenditure they incur and see where savings could be made.

• Could they buy from an alternative supplier
• Could they bulk-buy perhaps with a neighbour or two – to get better deals?
• Are borrowings structures to minimise the amount of interest paid?
• Could they get better electricity and insurance deals by shopping around?
• Could they make use of cloud-based technology to automate some of the book-keeping to reduce admin fees?

Some of these may seem insignificant compared to the direct payment income they will lose, but they may make a difference collectively. The impending withdrawal therefore needs to be seen as a wake-up call that leads to measures being taken to make the farm operations more efficient. Otherwise, in 10 years’ time, the current £1,600 average income from agriculture may look to be a great return.

Smith & Williamson is one of the leading tax and accountancy advisers to landed estates and farm owners. As a trusted adviser to our clients, we have helped many generations of families to achieve their personal and financial goals. Please contact us if you would like to discuss the impact that the withdrawal of the Basic Payment will have on your business and the ways that you may prepare your business for the future.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.