House of Commons - Public Accounts

Select Committee on Public Accounts Fifty-Fifth Report

1 The impact of delays on the farming sector

1. The European Union's single payment scheme, introduced as part of reforms of the Common Agricultural Policy, replaced 11 existing subsidies which had been based on agricultural production. Farmers in England can submit a claim under the single payment scheme in exchange for complying with European Union rules requiring them to maintain their land in good agricultural and environmental condition, and to comply with EU requirements relating to animal and public health, and animal welfare. The United Kingdom chose to implement the scheme in 2005, the first year of the new scheme. The changes to eligibility meant that more farmers, such as horticulturalists and those with small numbers of livestock, were able to claim for the first time, with the result that the number of claimants increased from 70,000 in 2004 to 116,000 in 2005.[2]

2. By the end of March 2006, however, only 15% of the £1,515 million due under the 2005 single payment scheme (£225 million) had been paid by the Rural Payments Agency compared to its target of 96%, and 85,400 farmers (73%) had not received any payment. At 30 October 2006 some 3,000 claimants still awaited payment, four months after the European Union deadline. The Agency's Interim Acting Chief Executive confirmed that the Agency was committed to make all payments by the end of 2006, except for those complex cases where there are issues of business liquidation or probate to be resolved. At 6 December 2006, 911 claimants had yet to receive payment, of which 39 were complex cases, and a further 2,184 claimants were awaiting a 'top-up' payment after receiving a partial payment earlier in 2006. By May 2007 there were still 24 claims, mostly probate cases, which remained unpaid, and the Agency was still reviewing the accuracy of a substantial number of claims already processed and making adjustments both for over and under payment.[3]

3. In consequence of the Agency's failure to administer the 2005 single payment scheme, a significant minority of farmers and their families experienced stress and increased financial costs, threatening the financial viability of their businesses. 16% of farmers postponed purchases or investments and 14% delayed payments to suppliers (see Figure 1) with consequent impacts across the farming sector. On advice from the British Bankers' Association the National Audit Office had estimated that the delays could have cost farmers between £18 million and £22.5 million in interest and arrangement fees on additional bank loans and increased short term borrowing on overdrafts, excluding any estimate for interest foregone by farmers whose bank accounts were in credit.[4]

4. Staff contacted by claimants lacked the knowledge to deal with queries, partly because the Agency had adopted a business process which allocated tasks across the organisation rather than enabling staff to deal end to end with individual claims. As pressure mounted, day to day communications with claimants became strained, and a lack of information on the progress of claims increased the stress and frustration amongst farmers.[5]

Figure 1: Action taken by farmers to mitigate against the delays in payment of the 2005 single farm payment

Source: National Audit Office

5. A variety of approaches had been taken at different stages to assist farmers waiting for payment, but there had been no specific focus on those for whom late payment would have the largest impact on the business. The Agency's primary priority had been those farmers with 'medium' or 'large' claims over £30,000. In practice, however, small claims were usually simpler and hence had proved easier to process. Single payment scheme funding typically represents a large proportion of family income for hill farmers, but these cases had not been given any priority unless they were 'medium' or 'large' claims. Such farmers' difficulties were compounded by the Agency's delays in processing the Hill Farm Allowance Scheme under which the Agency had made payments to only 65% of eligible claimants by late June 2006.[6]

6. In January 2006 the Department had considered making interim payments to farmers based on European Commission rules allowing payments of 60% of the validated element of claims. In deciding not to do so, the Department had balanced the benefits to farmers with the risk of disallowance and the effect on the 2006 scheme. It had also expected at that time to be able to make full payments in February 2006 which it believed was the farmers' preference, although the departmental Accounting Officer believed that there had been a "conspiracy of optimism" in the Agency on the achievability of the February date.[7]

7. In October 2006, the Agency paid £386,200 in interest to 2,559 claimants who had received payment after 30 June 2006, although a further 13,144 did not qualify for payment as their interest fell below the £50 eligibility threshold. The interest was calculated from 1 July 2006, at 1% above the London Interbank Offered Rate. The Department defended the rate of interest as that used in other cases of maladministration, such as those determined by Ombudsmen, for example.[8]

8. Payments due from the 2005 single payment scheme may have to be included in a farmer's trading accounts for 2005-06 and thus subject to income tax on any profits during the period. For those farmers required to account for their payments due in 2005-06, any income tax would become payable by 31^st January 2007. The Department confirmed that it would be unlikely for any farmers to find themselves in the position of owing tax on a payment they had not received. Her Majesty's Revenue and Customs would take a pragmatic view in these circumstances and be prepared to help where applicable.[9]



© Parliamentary copyright 2007	Prepared 6 September 2007