HC Deb 26 January 1998 vol 305 cc79-81W
Mr. Maclennan

To ask the Secretary of State for Scotland if he will publish the criteria which he applies for the purpose of establishing whether or not agriculture enterprises are separate businesses to determine their eligibility for assistance under IACS. [25420]

Mr. MacDonald

The criteria used by The Scottish Office are as follows.

IACS SEPARATE BUSINESSES: CRITERIA FOR SEPARATENESS

Background 1. The Scottish Office Agriculture, Environment and Fisheries Department and other UK Departments have to be able to demonstrate to the European Commission and other auditors that all the IACS rules are being followed. This is a matter of complying with Community law and non-compliance can lead to costly expenditure disallowance penalties. 2. The criteria for determining whether businesses are separate for IACS purposes have been developed on the basis of the definitions of "farmer" and "holding" contained in Article 1(4) of Council Regulation (EEC) No. 3508/92. In effect, an applicant under any of the main agricultural schemes, who may be an individual or a legal person, or a group of individuals or legal persons (regardless of the legal status of the group and its members), must submit a single Area Aid Application (AAA) for all the production units managed by him and within the UK. In other words, all land managed as one business, whatever the legal structure of the business, should be covered by one AAA. The criteria for establishing whether one business is separate from another have been published in the annual IACS explanatory booklets which have been distributed to farmers each year since 1993. 3. In order to form an assessment the practice is to consider four aspects of the way the business is run, namely—legal status, economic structure/organisation, commercial management and operational management. As indicated by the IACS explanatory booklets, no single aspect is paramount and it is the balance of factors which counts. Each case is therefore examined on its own merits to form a balanced judgement. The EC have subsequently endorsed the criteria.

Legal Status 4. If two or more businesses are to qualify as separate for IACS purposes, it will normally be required that each should have a distinct legal status, e.g. sole trader, partnership company etc. However, satisfying this requirement is not in itself sufficient to establish separateness, since businesses which are legally separate may still be regarded as operating together as a group (see paragraph 2 above). Similarly failing to meet this requirement is not in itself sufficient to be deemed to be one. Whether or not this is so can only be determined on consideration of the other three criteria.

Economic Structure 5. In considering the economic structure of a number of legally separate businesses in which certain individuals (or legal persons) have an interest, it is necessary to take account of:

  1. 5.1 the share holding or the partnership interest or voting rights of the directors, shareholders, partners, individuals (or legal persons) involved in the businesses;
  2. 5.2 who benefits from the profits/suffers any losses relating to the businesses.;
  3. 5.3 who has ultimate responsibility for making the longer term policy decisions that affect the profitability of each business.
Where necessary documentary evidence of the above will be sought e.g. partnership agreements. Where the same individuals (or legal persons)—
  1. (a) have a large majority shareholding or interest in, or
  2. (b) benefit from the profits or suffer the losses of,
the business concerned, this may indicate that the businesses should be considered as economically one business for IACS purposes. However, the commercial and operational structure will still be carefully examined and taken into account. Where no particular individuals (or legal persons) are dominant in these respects throughout the businesses concerned, then it is likely that the businesses would be considered separate for IACS purposes. Again, however, the commercial and operational structure will be taken into account before a determination is made.

Commercial Structure 6. In considering the commercial structure of the businesses, which, though legally separate, may fall to be treated as one, it is necessary to ascertain:

  1. 6.1 whether those with day-to-day management responsibility have complete discretion to buy or sell, whenever they choose;
  2. 6.2 who has day-to-day management responsibility for running each business, and, in some cases, the extent of their authority;
  3. 6.3 whether there are transactions for goods or services between the business and whether they are carried out at commercial rates (evidence of sales invoices/contracts may be required);
  4. 6.4 whether there is any evidence of cross subsidisation between the businesses;
  5. 6.5 whether the businesses have separate accounts, sales contracts, tax and VAT status.
Business are unlikely to be commercially separate for IACS purposes where: there is an overlap in the way in which the businesses are managed; those who have responsibility for running the businesses on day-to-day basis, lack of commercial independence; transactions of goods between the businesses are not accounted for in a way which would be expected from independent businesses; there is a lack of sound financial arrangements, which an independent agricultural business would be expected to have in place—e.g. itemised invoicing, and arrangements for invoicing and payment in good time; there is a lack of basic structures, which would be expected in running free-standing agricultural businesses—e.g. proper accounts, separate herd marks, separate land etc.

Operational Structure 7. It is necessary to consider the degree of operational separateness of cropping, stocking, machinery, labour, buildings and livestock housing, whether each legally separate enterprise has such things as its own supplies of food, fertiliser and land for grazing, livestock records, farm plans, registration and herd marks. Where businesses have very closely linked operational arrangements i.e.:

  • regular movement of stock almost exclusively between the farms comprised in the business, and the dependence of one farm on another for overwintering or grazing, beyond what would be common elsewhere in the locality;
  • lack of sufficiently separate arrangements for buying, making and storing stockfeed;
  • reliance by one farm on the other(s) for housing, feeding and supervising livestock, and common arrangements for buying, selling and transporting stock;
  • reliance by one farm on the other(s) for purchase of seed stocks, harvesting and storage of crops and common arrangements for dressing, sale and transport of crops produced;
  • extensive use of interchange of the same labour force, beyond what would be expected from independent businesses;
  • interchange of land, buildings and other fixed equipment;
they are likely to be considered as operationally one for IACS purposes. A degree of co-operation in the use of some resources would be permissible, but this should normally be of a limited, seasonal nature. For businesses to be considered operationally separate, there should be independent management and organisation of any stock involved. 8. Please note that it is a requirement in particular under Article 2(2) of Commission Regulation (EEC) No 3887/92 to ensure that the conversion of existing holdings or the creation of holdings after 30 June 1992 does not lead to the patently improper avoidance of the provisions relating to individuals' limits on eligibility for premiums or land set-aside requirements imposed under the main agricultural schemes.