Select Committee on Agriculture Minutes of Evidence


Memorandum submitted by the Ministry of Agriculture, Fisheries and Food (H 16)

INTRODUCTION

  1.  This Memorandum describes

    —  The EU legislative framework Administration and Control System (IACS);

    —  The financial control requirements on "paying agencies" which disburse CAP payments from the EU Budget:

    —  The implementation of IACS in England by the Ministry of Agriculture Fisheries and Food;

    —  Best Practice and benchmarking, both within the MAFF Paying Agency and between Paying Agencies across the EU;

    —  Plans for the future: merger of the paying agency functions of the Ministry and of the Intervention Board for Agricultural Produce (IB) to form a new CAP Paying Agency (CAPPA).

LEGISLATIVE FRAMEWORK

  2.  The Integrated Administration and Control System (IACS) was established by Council Regulation (EEC) No 3508/92 as a key element of the MacSharry CAP reform. The Integrated System, which was conceived as an anti-fraud and expenditure control-mechanism, originally comprised:

    —  a computerised data base of claim data;

    —  an alpha-numeric identification system for individual fields or parcels;

    —  a system for identifying and recording animals; and

    —  an integrated control system for claims.

  It made provision for:

    —  an area aid application to be submitted by farmers each year;

    —  on-the-spot inspections to be carried out on a specified sample for claims:

    —  the optional use of remote sensing to check area aid claims;

    —  protection of the data submitted by claimants; and

    —  co-financing (joint Commission and Member State funding) for the establishment of IACS and for remote sensing.

  3.  Subsequent amendments to Regulation (EEC) No 3508/92—most recently by Council Regulation (EC) No 1593/2000—have included the following:

    —  a requirement that, from 1 January 2005, the parcel identification system must be spatial in form (rather than alphanumeric), with the obligatory use of geographical information system (GIS) techniques and the optional use of aerial photoimagery;

    —  provision for the administration and control systems applying to non-IACS farm based aid schemes (such as agri-environment schemes) to be fully compatible with IACS by 1 January 2003;

    —  removal of the co-financing provisions for the establishment of IACS and for remote sensing.

  4.  IACS currently covers the following schemes:

    —  Arable Area Payments Scheme (AAPS), which from 2001 will include flax and hemp;

    —  Beef Special Premium Scheme (BSPS)

    —  Suckler Cow Premium Scheme (SCPS)

    —  Extensification Payments (EPS)

    —  Sheep Annual Premium Scheme (SAPS)

    —  Slaughter Premium Scheme and/or Veal Calf Slaughter Premium (SPS)

    —  Aid for Grain Legumes (GLS)

    —  Hill Livestock Compensatory Allowances (HLCAs) (until 2000). Hill Farm Allowances (from 2001)

    —  Rice Regime

    —  Direct payments to producers in the dairy sector (from 2006).

  In addition, a number of the measures under the Rural Development Regulation (RDR), eg agri-environment schemes, are linked to IACS and cross-checks of claims data with IACS data are required.

  5.  Detailed rules for the implementation of IACS are set out in Commission Regulation (EEC) No 3887/92. These rules include detailed prescriptions for such matters as:

    —  the proportions of claims that are subject to on-the-spot-controls (five per cent of area aid claims and 10 per cent of livestock claims);

    —  the risk criteria for selecting claims for inspection;

    —  the sanctions that must be imposed for over-declarations of land or of animal numbers, and for late applications;

    —  reimbursement of any over-payments made; and

    —  the extent to which producers may be exempted from sanctions for reasons of force majeure.

  The Regulation has been amended several times, most recently by Commission Regulation (EC) NO 2801/1999. Some of the most important changes have been, firstly, a degree of moderation in the penalty provisions (including the removal of sanctions for farmer-reported errors in some circumstances) and secondly, changes to the livestock control provisions and penalties to take account of the introduction of computerised cattle databases.

  6.  The EC Regulations accordingly provide the principal legislative basis for IACS and are directly applicable in Member States. However, certain aspects of the operation of the Integrated System can only be specified by national law. These include provisions which the EU Regulations leave to Member States to specify, such as the minimum size of an agricultural parcel; powers of entry in connection with controls; and criminal offences. The provisions applicable in the United Kingdom were specified by the Integrated Administration and Control System Regulations 1993 (SI 1993/1317), as last amended by The Integrated Administration and Control System (Amendment) Regulations 2000 (SI 2000/2573), and by Statutory Instruments making provisions for individual schemes.

REQUIRMENTS FOR FINANCIAL CONTROL

  7.  The framework for control of expenditure under the Common Agricultural Policy (CAP) is set out in Council Regulation 1258/99 (which has replaced Regulation 729/70), and can be summarised as follows:

    —  The initial responsibility for checking expenditure lies with the Member States, which designate "paying agencies" ie the authorities and bodies empowered to effect CAP expenditure. Member States must carry out this task fully and effectively;

    —  The Commission, which is responsible for managing the EU budget, must verify the conditions under which payments and checks have been made. Expenditure by Member States can only be reimbursed where those conditions ensure compliance with EU rules;

    —  Under this decentralised system of management of EU expenditure, the Commission, as the institution responsible for funding, must be able to carry out all necessary checks on the management of expenditure;

    —  During the "clearance of accounts" ie the annual process of checking Member States' expenditure, the Commission cannot determine the total expenditure to be financed from the EU budget unless it is satisfied that national controls are adequate and transparent and that paying agencies verify the legality and regularity of the payments the make. In order to provide this assurance, conditions have been set for the "accreditation" of paying agencies by Member States;

    —  To ensure that the standards required for accreditation in Member States are consistent, the Commission provides guidance on the criteria to be applied. Payments by Member States under the CAP schemes can only be made by accredited paying agencies.

  8.  Detailed rules for accredited paying agencies (and for a "co-ordinating body" where there is more than one paying agency in a Member State) are set out in Commission Regulation 1663/95. This lays down the required structure for a paying agency, which comprises three principal functions and two services:

    —  the authorisation of claims (determining how much should be paid to a claimant);

    —  the execution of payments (paying the authorised amount to the claimant);

    —  accounting (recording payments and recoveries in the agency's accounts and preparing monthly and annual declarations for the Commission);

    —  the internal audit service (independent evaluation of the paying agency's internal control systems); and

    —  the technical service (verifying the physical and documentary facts supporting claims, eg through in-office checks and on-the-spot inspections).

  9.  The paying agency may allow other bodies to perform all or part of the authorisation function and/or the technical service so long as certain stringent conditions are met. However, the execution of payments and accounting function cannot normally be delegated to another body. Regulation 1663/95 also requires the paying agency to put in place a series of controls covering: written procedures for staff; adequate division of duties; defined responsibilities and financial limits of authority for each official; staff training; checklists and senior management review; and computer security and system development.

  10.  Paying agencies are subject to annual audit by the "certifying body" (currently the National Audit Office for MAFF). The Commission uses the certifying body's report as supporting evidence for its annual clearance of accounts decision. The Commission also conducts a rolling programme of audits in respect of particular schemes or sectors. The results of both kinds of audit form the basis of "financial corrections", ie disallowance of EU reimbursement to Member States.

  11.  The European Court of Auditors (ECA) visits paying agencies as part of its own audit of the Commission's management of the CAP. The ECA's work takes the form of an annual "Statement of Assurance" audit coupled with audits of individual sectors. The ECA has recently conducted an audit of the application of IACS in the UK as part of a wider audit of the operation of IACS across the EU.

  12.  Expenditure on CAP schemes is subject to the general anti-fraud provisions of Article 280 of the Treaty and Council Regulation 2988/95 on the protection of the EU's financial interests. In addition, Article 8(1) of Regulation 1258/1999 requires Member States to:

    —  satisfy themselves that transactions financed by the EU budget are actually carried out and executed correctly;

    —  prevent and deal with "irregularities" ie payments which are not in compliance with EU rules;

    —  recover sums lost as a result of irregularities or negligence.

  This provision, together with Council Regulation 3508/92 and Commission Regulation 3887/92, is the legal basis for the IACS regime as well as for a system for irregularity report to OLAF (the commission's anti-fraud unit) under Council Regulation 595/91.

  13.  Taken together, the provisions of Regulations 595/91, 1663/95 and 1258/99 set up a stringent system of financial control on paying agencies. In particular, they provide for four separate levels of audit of an agency's operations: by the internal audit service, by the certifying body, by the Commission's Clearance of Accounts Unit and by the European Court of Auditors. Details are given in Annex C of the levels of disallowance that were applied for all Member States in the years 1993-99 for deficiencies in implementation of EU Regulations or failures in financial control.

ADMINISTRATION OF CAP SCHEMES IN ENGLAND

  14.  The MAFF Paying Agency is responsible for administering the CAP schemes making direct payments to farmers, and the associated control regimes such as IACS, within England. It comprises the following elements:

    —  Co-ordination of activity within the Paying Agency is undertaken by CAP Schemes Management Division (CSMD), based in London, working in conjunction with a number of National Scheme Management Centres (NSMCs) and in particular with the IACS NSMC and Finance Lead Region based at Reading Regional Service Centre.

    —  The day to day scheme administration, including data entry, claim processing, dealings with customers, casework and field inspection, is carried out by MAFF's nine Regional Service Centres (RSCs); and some RSCs also act as National Scheme Management Centres (NSMCs) for one or more of the schemes. The RSCs employ some 2,000 staff and report to the Head of Regional Services Group, as does CSMD.

    —  The execution of and accounting for payments is performed by MAFF's Resource Management Division (RMD) at York.

    —  Internal audit is carried out by MAFF's Internal Audit Division, based in London, York and Guildford.

  15.  The scheme management responsibilities carried out by CSMD and NSMCs cover areas such as:

    —  preparation of scheme literature, ie guidance and forms:

    —  scheme implementation plans and budgets;

    —  management information and reporting;

    —  development of IT systems, including risk analysis for the selection of inspections;

    —  interpretation of scheme rules and guidance to RSC staff through scheme chapters and system manuals;

    —  work to ensure the implementation of accreditation criteria and consistency of scheme implementation, eg through training and best practice visits;

    —  liaison with auditors;

    —  PQs and Ministers' correspondence;

    —  Provision of information and evidence to Parliamentary Committees and to the Parliamentary Commissioner for Administration.

  16.  The Paying Agency has to ensure that its systems and procedures comply with EU requirements and that performance targets are met. These targets are derived from the Ministry's Objective No 6:

    "to administer payments under the Common Agricultural Policy fairly and in full accordance with EU requirements".

  Within this overall objective, Regional Services Group has been set the following targets in 2000/01:

    —  to provide a high quality service to the farming community by meeting targets in "Commitment to Service" and by issuing scheme literature by agreed deadlines.

    —  to pay 98 per cent of claims (96.15 per cent by value) by the EU payment deadlines;

    —  to keep disallowance to less than 0.5 per cent of payments;

    —  to complete 100 per cent of the EU targets for on-the-spot inspections;

    —  to ensure that effective IT systems are implemented by achieving the milestones set out in relevant IT redevelopment plans.

  In addition, efficiency indicators have been introduced which require RSCs to achieve:

    —  three per cent reduction in processing cost per claim;

    —  three per cent reduction in cost per field inspection;

    —  three per cent reduction in the administrative cost of making every £ of scheme payments in the current financial year.

  17.  In Scotland, CAP schemes making direct payments to farmers are administered by the Scottish Executive Rural Affairs Department (SERAD), in Wales by the national Assembly for Wales Agriculture Department (NAWAD) and in Northern Ireland by the Department for Agriculture and Rural Development (DARD). Officials from the four Departments remain in close touch and meet on a regular basis to discuss and co-ordinate scheme administration across the UK.

  18.  The Intervention Board, as well as operating schemes making payments to traders both in England and in the rest of the UK, acts as the UK Co-ordinating Body, promoting the harmonised application of scheme administration among the paying agencies. The Board also performs the role of funding body, transferring funds to MAFF and the other paying agencies to allow them to make payments to applicants and then claiming reimbursement of scheme expenditure from the EU. MAFF policy divisions represent the UK in EU negotiations and co-ordinate the preparation of domestic legislation, in co-operation with the devolved administrations.

  19.  Annex A shows for the all the schemes:

    —  the application periods;

    —  for the livestock schemes, the "retention periods" ie the periods of time that farmers are required to keep the animals for which they have claimed subsidy on their holding;

    —  the "payment windows" ie the periods during which payments should be made.

  It should be noted that no claim can be paid until it has been validated by the processing system and, if selected for inspection, until after the results of the inspection have been taken into account. Nor can payment take place until the payment window opens. More details about individual schemes are given in Annex B.

  20.  All farmers claiming Arable Area Payments, Beef Special Premium, Suckler Cow Premium, the LFA supplement to the Sheep Annual Premium and/or Hill Livestock Compensatory Allowances (from next year Hill Farm Allowances) are required to submit an annual aid declaration, ie an IACS form. This form contains details of the land used for arable crops, which thus constitutes the claim for AAPS, and that used for forage, which underpins claims for the livestock premia. In 1999, 74,561 farmers submitted IACS declarations to RSCs. The table below shows the total number of claims made in 1999 and the amounts paid out.


 
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