Entitlements can be bought with or without land under the new CAP system, similar to last time. They can be leased with land just as before and, for the first time, they can be leased without land. However the big question is – will farmers buying or leasing the new Basic Payment Scheme (BPS) entitlements be asked to pay not just the basic payment element, but also the greening top-up linked to it as well.

There are actually no entitlements to sell, buy or lease at present. In 2015 we are between the periods when all the old single farm payment entitlements were extinguished on 31 December 2014 and when the new basic payments entitlements will be created.

Establishing new entitlements

Firstly, how do farmers get new entitlements? To establish new Basic Payment Scheme entitlements a farmer must have an entitlement allocation right, be successful in the National Reserve or slip in under the Scottish Derogation. The Scottish Derogation is where a farmer submitted a 2013 and 2014 SFP application but has never owned an entitlement. They start on zero and work up to 60% of the national average (€104/ha) by 2019. Successful farmers under the National Reserve will be given the national average of €172/ha.

Most farmers automatically get an allocation right, as they received a direct payment greater than €100 in 2013 under the Single Payment Scheme, the Grassland Sheep Scheme, the Beef Data Programme, the Burren Farming for Conservation Programme or any combination of these schemes.

The number of entitlements an applicant can establish is the number of eligible hectares declared by the farmer in 2013 or 2015, whichever is the lower.

For example, take a farmer who received a direct payment in 2013 and declared 50ha of eligible land in 2013. He could establish up to 50 entitlements but if he declares 30ha in 2015, his allocation of entitlements will be based on 30, the lesser number.

The next question is – how much will they be worth? This starts with the reference value. This is the total value of entitlements owned (held or leased out) by a farmer under the Single Payment Scheme in 2014. Any payment received for the Grassland Sheep Scheme in 2014 is also added in.

A fixed percentage of this reference value (around 65%) is carried forward to the 2015 scheme year and forms the basis for calculating the value of a farmer’s new entitlements in 2015 under the Basic Payment Scheme.

Take a farmer with a €10,000 reference value from 2014. Based on the calculation outlined previously, around €6,500 of this will form his basic payment. He farmed 40ha in 2013 and 2014. If he submits the 40ha again in 2015 he will establish 40 basic entitlements with a value of €163 each.

Greening payments

The completely new element of entitlement trading is greening. A 45% greening top-up is applied to the basic entitlement. For this farmer it brings his total payment closer to €246/ha. Effectively, these are two separate payments linked to the one entitlement. However, you must get the Basic Payment to qualify for the greening top-up.

As the value of this farmer’s payment is between 90% and 100% of the national average, his entitlement value will remain static in the coming years. If the same farmer submits only 30ha in 2015, he will establish just 30 entitlements with a basic value of €217/ha. However, this higher value will expose his entitlements to cuts under convergence. The greening top-up will be worth €98/ha, bringing the initial total value up to €315/ha, but this too will reduce over time. You still need one eligible hectare to draw down one entitlement in the new system.

There will really be three types of basic entitlements:

1. Increasing - Entitlements that start with values at or below 90% of the national average (below €155/entitlement). These will gain in value over the five years to 2019. The lower the value at the beginning, the more they gain. All entitlement values must be within 60% of the national average (or €103/entitlement) by 2019.

2. Steady - Entitlements starting between 90% and 100% of the national average or valued from €155/ha to €172/ha. These entitlements will stay around the same value.

3. Decreasing - Entitlements that are valued above the national average of €172/ha. These will be reduced in five equal steps to fund the increases in the low-value entitlements. The higher the value at the start, the greater the cuts will be. All basic entitlements will be below €700/ha by 2019.

How will trading go in 2016?

Looking back, farmers who bought entitlements early in the last CAP regime certainly got the best value. Prices increased in 2014 as farmers realised that part of the value would be carried forward to the new payment system. The value of entitlements ranged from a multiple of one for low value entitlements up to three times face value for very high value entitlements.

Putting a value on Basic Payment entitlements will be much more difficult in 2016. On the one hand, with the rules now set, you are effectively buying an income stream for the next five years. This income stream will be increasing in the case of low value entitlements but it will be decreasing for entitlements that are above the national average to begin with (see table).

These values are known, so this should make them easy to put a price on entitlements. However, the likely income tax which each farmer is subject to will influence what they should actually pay. The other question relates to the greening payment, especially with regard to tillage farmers who have to comply with crop diversification and ecological focus area restrictions to actually get it.

Also the Department of Agriculture has made the decision to introduce a 50% clawback on the sale of entitlements without land for the 2016 scheme year. This will slow down the supply of entitlements and increase what buyers will ask for their entitlements to recoup some of the loss. Many will opt to lease to avoid the clawback altogether.

Lease or lose

Leasing entitlements without land is completely new. It can be done year after year or as part of a long-term lease. The price farmers pay to lease entitlements will be dictated by supply and demand and how the greening element is viewed. Again, tax has to be paid on income, so it means that it has to be less than face value.

There is a greater risk of losing entitlements to the National Reserve under the new regime. In the 2008 health check, the use it or lose it rule was tightened so that farmers had to use entitlements every second year to avoid losing them.

However, the ability to rotate entitlements meant that many farmers with more entitlements than land could hold on to all their entitlements as long as they used 51% of them each year.

Under the new regime there is no rotation and the use it or lose it rule means that farmers have to use all their entitlements at least one year in two. Entitlements not used for the second year in a row will go to the National Reserve. This will put pressure on farmers to lease out their entitlements rather than lose them completely. This puts more power in the hands of active farmers.

Tax implications

When Single Farm Payment entitlements were established in 2005, they were given a value of zero for capital gains tax purposes. That meant that if a farmer sold entitlements without land he/she could potentially be hit with a capital gains tax which had increased to 33% by 2014, the final year that they could be sold. The new basic payment entitlements, when established, will have strong links to the old system. These links weaken due to convergence and greening as we move towards 2019.

Indications are that Revenue will attribute around 66% of the value of SFP entitlements to the basic payment entitlements. This will reduce the tax implications for farmers who have held initial entitlements since 2005 and sell from 2016 on. It also affects anyone who inherited or got a gift of entitlements, as they were valued at market value, not zero. Likewise, anyone who bought entitlements since 2006 also had the market value at the time put on their entitlements.