Further supplementary memorandum from
Department for Environment, Food and Rural Affairs (DFoB 10b)
FOLLOW UP
TO 28 OCTOBER
EFRA HEARINGS ON
DAIRY FARMERS
OF BRITAIN
Following my appearance in front of your committee
on 28 October your clerk asked a number of follow up questions.
Our responses are below.
In addition I enclose a copy of the Report prepared
for Defra that outlines the work EFFP did for Defra from 2003-08
as requested. Please note that Annex 2 contains details of
individual businesses and should not be put in the public domain.[12]
I also enclose a report commissioned by Defra and
prepared in 2005 by EFFP in collaboration with others on legislative
and fiscal barriers to greater collaboration and co-operation
which is relevant to your inquiry.[13]
This report contained a number of recommendations
for change. Key issues included tax liabilities created when reserves
are allocated to members and maximum permitted shareholdings.
Following its publication Defra held discussions about taking
forward the recommendations with HM Treasury, HMRC and the FSA
(facilitated by EFFP). Some of the key proposals, eg removal of
the £20,000 limit on maximum shareholding, involved changes
to legislation and had potentially far reaching implications for
the cooperative sector as a whole, beyond that of agricultural
businesses. With that in mind, government concluded at that time
that the evidence put forward by EFFP for those changes was insufficient.
Over what period did the English Farming and Food
Partnership work with DFB? (Q478 and Q497 in the transcript)
Pages 33-34 of the 2003-08 report describe the
work EFFP carried out with DFB. This does not give the details
of the period of this work but we understand from EFFP that this
was part of a Plunkett Foundation initiative that ran from April
2006 to October 2009 to help identify and develop potential future
directors of the business. EFFP's direct involvement was to support
two separate groups of scholars on two separate occasions. The
first was April 2006 to September 2006. The second was April 2007
to October 2007. In both cases EFFP delivered personal development
plans and training needs analysis. Both sets of scholars also
undertook further training with the Plunkett Foundation but without
EFFP's involvement.
From April 2007 to August 2007 and at the request
of the DFB Council EFFP advised on the establishment of a bespoke
system to review and improve the council's performance and in
particular that of the Regional Council Chairs. This included
designing a bespoke set of competencies, conducting a Training
Needs Analysis exercise and a 360 degree appraisal exercise. All
regional chairs were provided with a Personal Development Plan,
based on the findings of both these exercises. A report on the
development of the full group was also produced. Again, the Council
members did some follow on work with the Plunkett Foundation but
EFFP were not involved in it.
What did EFFP's report say about good governance
in co-operatives? (Q485)
The 2003-08 report refers to the work it carried
out on governance and leadership of Farmer Controlled Businesses
(FCBs) on pages 31-32. In general their goal was to encourage
boards of FCBs to adopt established governance best practice in
line with the recommendations of the Combined Code for Listed
Companies. EFFP developed eight governance tools and services
ranging from a short board health check to a comprehensive governance
review.
What is happening with regard to both general
sympathetic tax treatment of former DFB members, and the specific
issue of the difference in tax treatment that has arisen because
of the debt for equity swap that DFB agreed in March 2009? (Q511
and Q512)
In general terms where a farmer is unable to recover
monies owed from trade debts the loss can, subject to certain
conditions, be allowed for income tax purposes. If the loss is
on capital account, for example from certain types of loans or
share capital, any loss incurred is normally relievable against
capital gains. The facts of each case will be determinative but
it is likely that most farmers will have a mix of both.
The swap of members' investment accounts for shares
is a question of fact, and HMRC cannot ignore transactions that
have taken place. Income tax relief is not available for losses
made on the shares in DFB. Instead capital gains relief may be
available on these shares and HMRC have requested additional information
from the receiver in order to clarify the position. Even if HMRC
could overlook the debt for equity swap, income tax relief would
not have been available for losses made on the members' investment
accounts.
The tax situation for farmer members of Dairy
Farmers of Britain is complex and HMRC is working towards a specific
statement as soon as possible after the information is obtained
from the Official Receiver.
What action was taken in response to the NFU's
letter about extending the implementation timetable for NVZ requirements
in the light of the disruption caused by the collapse of DFB?
Was the Commission approached about this matter? (Q517)
The NVZ Action Programme in England is a carefully
considered package, based on the evidence, for advancing our aims
for protecting the water environment and meeting our legal obligations
under the European Nitrates Directive, whilst taking into account
farmers' practical concerns. In developing the Action Programme,
we built in a reasonable period of adjustment in recognition of
the fact that farmers needed time to comply with some of the measures.
In the case of slurry storage facilities, we allowed a three year
compliance period, which we increased from our original proposal
of two years in the light of comments received during the consultation
process.
The NFU's request in light of the collapse of Dairy
Farmers of Britain was to extend this slurry storage compliance
period by a further year, to 1 January 2013, for all dairy farmers.
We considered that carefully. However, we did not feel there was
a case for extending the period further, as this NVZ Action Programme
only lasts for four years: granting an extra year to comply with
the storage capacity requirements (and the related "closed
period" rules) would as good as remove dairy farmers entirely
from the Programme. We also took account of the fact that we had
obtained, for the benefit of dairy farmers a derogation from the
livestock manure nitrogen farm limit of 170kg nitrogen per year,
which is one of the more demanding requirements of the Nitrates
Directive. And that, in the case of the DFB farmers, we had taken
action early on to alert the banks to the situation facing them.
All in all we concluded that we should not take a step which would
amount to exempting the dairy sector from the Action Programme:
there simply was not sufficient justification for so radically
watering down what we have put in place to meet our environmental
aims and legal obligations.
You suggested that as a fallback we could extend
the period only for those dairy farmers affected by the collapse
of DFB. This would raise the issue of inequality between different
groups of dairy farmers, which in turn could well mean that the
extension would turn out to have to be applied to the whole sector,
so bringing us back to the position I have covered in my previous
paragraph. But in any case almost all the issues I have pointed
to above would still apply under the fallback proposition. So
extending the compliance period for the DFB farmers is not a move
which we consider justified. While the dairy industry may currently
be facing difficult trading conditions due to the global economic
situation following the commodity spike in 2008, the longer term
prospects for the dairy sector are encouraging and we have seen
little evidence that this particular issue is affecting DFB farmers
disproportionately.
I should like to emphasise that the derogation
allowing grassland livestock farmers to apply annually for permission
to farm to a limit of 250kg, rather than 170kg, of livestock manure
nitrogen per hectare will substantially alleviate the burden imposed
on dairy farmers by the new nitrate requirements. We estimate
that it will reduce the costs of complying with the Directive
by £16.9-£21.7 million per annum—which represents
about 50% of the overall costs to the dairy sector. The European
Commission decision granting the derogation expires on 31 December
2012 and if we are to seek to extend this by a further four years,
it is going to be important that we can convince the Commission
and other member states that we have committed ourselves to the
Action Programme and that it is effective and successful. That
is another reason why we believe we should only contemplate extending
the compliance periods that we negotiated with the Commission
for specific measures within the NVZ Action Programme where there
is very strong justification to do so.
I trust that this addresses your questions and
I look forward to hearing the results of your inquiry.
Department for Environment, Food and Rural Affairs
November 2009
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