Euro exchange rate and poor weather combine to challenge farm finances
Published: 4 Oct 2012 13:000 comments
In 2011, the exchange rate used to calculate the value of Single Farm Payment (SFP) contributions in the UK was fixed at 1 = £0.86665. This time, however, the figure will be 79. 805 pence to the Euro. The year-on-year change in the exchange rates equates to an approximate reduction in value, from a Sterling perspective, of approximately 7.7%.
Where a direct payment is made under Single Farm Payment Scheme to a beneficiary in a currency other than the Euro, the member state will convert the amount of aid expressed in Euros into the national currency on the basis of the most recent exchange rate set by the European Central Bank prior to October 1 of the year for which the aid is granted. For 2012 Single Farm Payments the Euro exchange rate is therefore the rate for Friday, September 28 2012.
The vast bulk of farmers draw down their Single Farm Payment contributions in Sterling, so the anticipated reduction in this year's EU support levels, will come as more bad news for producers already battling against challenging farmgate returns, ever strengthening input costs and - of course - the continuing bad weather.
The Single Farm Payment continues to make a crucially important contribution to the financial well being of agriculture in Northern Ireland, accounting - in most years - for the lion's share of the profits made by local farmers. Recent months have been marked by a significant strengthening of the pound sterling against the Euro. The weakening of the European currency can, to a large extent, be accounted for by the economic trauma that has occurred in countries such as Greece, Spain, Portugal and the Republic of Ireland.
Another important effect of the exchange rate trends witnessed over the last few months has been the loss of competiveness experienced by the many food companies in Northern Ireland exporting into the Euro zone. Moreover, food imports from the Euro Zone are now more competitive within the UK market as a whole. This means that local food companies - and farmers - are losing out on two fronts.
As we have all learned this year, farming results are very much influenced by the weather. Profits may fluctuate substantially from year to year with the result that a farmer might pay higher rate tax one year and little or no tax at all the next. In order to mitigate the cash flow effects of this situation, it is possible for the farmer to make a claim to Revenue & Customs for 'averaging'.
A claim for averaging can be made by a sole trader, a partner, an executor or a personal representative who is carrying on the trade of farming. Averaging is not available where the trade carried on is agricultural contracting or, for example, haulage. Companies may not claim farmers' averaging.
The claim covers two consecutive years of farming and neither of those years must be the year of commencement or the year of cessation, or precede a year which has already been included in an averaging claim. The profits dealt with in the claim are after capital allowances. For full averaging, the difference in profits must be at least 30% and for partial averaging 26%. If the difference in profits between the two years is 25% or less of the higher figure, no relief is available.
The time limit for making a claim for farmers' averaging is 22 months after the end of the second year of assessment. Farmers' Averaging can result in a significant beneficial cash flow advantage to the farm business, as well as a potential reduction in the rate of tax payable.