Understanding Basic Payment Scheme Entitlements
Farmers across the country have recently received letters giving them an update on their Basic Payment Scheme (BPS) entitlements. I want to help explain some of the detail around the calculation of your entitlements. To allow me to be as precise as possible, all the figures I quote in my calculations are to six decimal places.
We are moving towards the situation where every hectare of eligible land will attract the same level of support – a “flat rate”. This is calculated to be €229.27 by the year 2021 plus the Greening Payment of €101.15 making a total payment of €330.42. Your total payment is therefore now made up of two parts; the BPS and the Greening Payment. The value of entitlements held by farmers on 15 May 2014 will be scaled back by 32.455310% in order to provide funds for Greening Payment, Young Farmers’ Payment and Regional Reserve. Farmers who meet the greening criteria will receive a Greening Payment equal to 44.117647% of the value of BPS entitlements activated in 2015.
The value of entitlements after 2019 will depend on the outcome of future EU CAP Reform negotiations since the current EU CAP legislation covers the period up to the end of 2019. The intention of DARD is that all entitlements will be at the regional average by 2021.
So what does this mean for you? It depends on whether your initial BPS entitlement unit value (per hectare) is above or below the regional average of €229.27.
- If you have BPS entitlements below the regional average they will be increased in five equal steps towards the average. By 2019 they will have moved 71.4% up towards the average; 14.28% each year
- If you have BPS entitlements above the regional average they will be reduced in five equal steps towards the average. By 2019 they will have moved 74.8% down towards the average; 14.96% each year
For most famers, the letters received recently give the total number of entitlements that have been allocated to their business and the provisional total value of their BPS entitlements. This figure does not include the Greening Payment which can be calculated by taking 44.117647% of your provisional total value of the BPS entitlements. Please note that the figures are provisional as they are based on the expected number of successful applications for the BPS.
So for example, if your letter stated you had a total of 100 entitlements with a provisional total value of BPS entitlements of €10,000 (each hectare therefore getting a unit value of €100):
- Your Greening Payment will be €10,000 x 44.117647% which equals €4,411.76
- Your total payment will therefore be these two figures added together which is €14,411.76
Since the BPS unit value is less than the regional average, it will continue to increase each year until it is 71.4% of the difference between their initial unit value and the regional average at 2019. Please note in the example above, the €100 is the value after the first of the five steps has been made. A complete worked example showing the calculation of BPS entitlements and Greening Payment is attached to your letter.
You may have recently received a letter updating you on the BPS, which stated that it was not possible to confirm if your business is eligible to establish BPS at that time. This simply means your application is still being processed. Once your application Is processed, if your farm business is eligible to establish BPS, you will receive an entitlement letter confirming the details. If you have been asked for further information, ensure you send this through, if you haven’t already done so.
To plan for the future, it is important you calculate the value of the payment you will receive in the coming years. Keeping your bank informed of the changes is also important, particularly if your payments are being reduced each year. The euro/pound exchange rate will also affect the value of your payment. The exchange rate used for the 2015 payments was €1 = £0.73129.
For further information, please see our Question and Answer document together with a calculator showing your estimated yearly entitlements
Telephone: 0300 200 7848.
Measure to manage
Many farmers are so busy working that they don’t take time to stop and look at performance and finances. Financial accounts which are used to calculate tax repayments are produced by all farmers and growers. In most cases an account is prepared which describes the profit or loss for a period of time. However historic financial accounts are of limited use in managing a business on a day to day basis. Other more useful options include the following.
- Benchmarking – this evaluates the physical and financial performance of your business and compares the results with similar businesses. This helps identify areas where improvements could increase profitability. A data collector visits your farm to collect the information needed. CAFRE then produces a benchmark report, the details of which are discussed on farm with your local Development Adviser.
- Monthly recording - this involves recording a small amount of information each month allowing more up to date analysis of both physical and financial performance. The monthly results enable identification of shortfalls, changes can then be implemented quickly and the resulting performance monitored.
- Cash flow budget - this shows how money is earned and spent in a business. It also highlights when there is likely to be a cash deficit. This enables you to make contingency plans by talking to your bank before you reach your borrowing limit or before you are unable to pay bills. Talk to your bank if you think you may experience cash flow difficulties as the sooner they know the sooner something can be done. Banks don’t like surprises!
Essential versus non essential expenditure
Those of you experiencing falling output prices may be thinking about stopping all expenditure. It is better to critically examine expenditure and if you ‘spend a pound to get two’ still do it, even in times of poor prices. One area worth looking at is machinery investment. As the cost of machinery is one of the highest farm overheads carefully consider the purchase of any item of machinery.
Energy efficiency is a topical issue. With changes to Renewable Obligation Certificate (ROC) payments expected in October 2015, installing solar PV is still a sensible option on many units. In most cases the payback on these installations is relatively short, making them an attractive proposition.
Head of holding
If you are planning to make your son or daughter head of holding consider the implications this might have for student loans, family tax credits, etc. A larger single farm payment needs to compensate for other potential negative implications. It is worth speaking to your accountant about this.
Irrespective of business type or indeed prevailing market conditions two statements hold true, namely, ‘Get better before you get bigger’ and ‘Profit equals margin times volume’!
Has it been a taxing year?
We are already well into 2014 and you should now be thinking about how the farm business is going to look at the end of the 2013/14 tax year. There is still plenty of time to plan how to manage your tax liabilities for the current year and plan for the year ahead. So if you haven’t already done so, I would recommend you make an appointment with your accountant or tax adviser.
It is important to consider options for reducing your tax liabilities and using any money available wisely to benefit your business. If you are reading this thinking you will be faced with a tax bill this year, it is a good sign; tax means you have made a profit. It goes without saying however, that none of us like to pay taxes. I have outlined below a few options to help minimise your tax liability.
Paying off debt
Last winter and spring was tough for farm businesses and in many cases overdrafts and merchant credit had to be extended as extra fodder and feed stuffs were purchased. Paying off debt when you can is important. We don’t know what the markets or weather will throw at us in the years ahead so it is better to repay debt in the better times to reduce the financial burden in the hard times. Speak to your bank manager and work out a plan to pay off your debt.
The annual investment allowance (AIA) has been temporarily increased to £250,000, coming into effect from 1 January 2013, making investing in plant or machinery an attractive option for reducing your tax liability. It is good practice to have a machinery replacement policy for your business to allow you to plan ahead and structure your capital spending.
The AIA is due to return to £25,000 on 1 January 2015. This will then affect your AIA for the portion of your tax year after 1 January 2015. If your accounting period ends 6 April 2014, you can claim the full £250,000 allowance. There has never been a better opportunity. Any proposed purchases require careful consideration. Remember, it does not make financial sense to buy equipment for the sole purpose of reducing your tax bill.
The Government encourages us to save for our retirement by providing tax relief on pension contributions. For personal pensions you pay income tax on your earnings before you make a contribution to the pension. However, your pension provider will claim back, at the basic tax rate of 20 per cent, your contributions from the Government, adding it to your pension.
If you are paying a higher rate of tax, you can claim the tax back either through your tax return or by contacting HMRC. Your accountant or financial adviser can also advise you on options for setting up trusts for your children or grandchildren.
Making a donation to a registered charity is perhaps something you already do. If you are a sole trader or a partnership you can take advantage of the tax reliefs on gifts of money to charities and can claim them on your Self Assessment tax return.
If none of the tax minimisation options above are appropriate then you must pay the tax due. Remember, you pay only a proportion of your profit in tax and the rest can be saved or invested for when you really need it.
The deadline for paying tax is 31 January for tax on profits made in the previous tax year. For example, tax due on 31 January 2014 was tax owed on profits made during the 2012/13 tax year.
Your tax demand may also include a ‘payment on account’ which is the first of two estimated part-payments for the current tax year’s liability. The second’ payment on account’ is due on 31 July each year. It is important to remember that tax owed on a year when profits are good is often due during a year when profits are lower and so it is important to budget for your tax payments.