City dwellers are making huge profits out of an EU loophole that allows people who have never set foot on a farm to claim European farm subsidies.

The loophole allows investors to become classified officially as farmers and then buy the right to receive annual EU subsidies to cut agricultural production. Because the subsidies are decoupled from the land they relate to, investors do not need actually to own the ground they are claiming for or even go anywhere near it.

The profits to be made are enormous, with investors potentially increasing their capital nearly fivefold in 5 years.

Auctioneers and brokers who used to sell cattle and farm-land are now focusing their attention on selling the rights to receive European taxpayers’ money — known as entitlement trading — in what one described as a “ferocious” market with the rights to subsidies “flying off the shelf”.

Demand is outstripping supply by five to one, because the profits from investing in subsidies are up to ten times higher than putting the money in a bank. After making a one-off payment, the investor is entitled to receive from the taxpayer every year a cheque that typically amounts to a third of the original investment.

Open auctions are being held — with one in Aberdeen due next Friday — while investors are also buying the rights to subsidies over the telephone, through brokers, through internet auction sites and inter-active trading.

The EU pays £60 billion a year in farm subsidies, which were originally aimed at boosting production, but last year farmers were given — free — the automatic right to subsidies, known as the single farm payment entitlement, in return for reducing production. They were also given the right to trade the subsidy entitlements between themselves, but the legislation is so loose that in practice anyone can officially qualify as a farmer.

British farmers claim around £5 billion a year of the subsidies in return for which they are meant to make environmental improvements to the land.

However, many are using their new right to sell the subsidies in order to raise a lump sum when they retire or to pay for new equipment.

Giles Lane, of C&D Property Services, which brokers the rights to farm subsidies, said: “You don’t need a farm to claim the entitlements. Sitting in your living room in London you could be claiming them.

One farmer emigrated to Aus-tralia and he’s still claiming the entitlements from there. It seems bizarre, but it’s totally legal. It’s how the Government wanted to set up the reforms.”

George Paton, of the agricultural brokers WebbPaton, who did 15 deals in one day last week, said: “This entitlement is detached from land. You pay £130 per hectare, and you get £624 per hectare back by 2012. It’s better than a building society, but it is high risk.”

The money will be paid until the next wave of EU farm reforms, which will not happen until 2013 at the earliest.

The loophole has been exposed by the Eurosceptic think-tank Open Europe, based in London, which last month sent a researcher to In-verurie in Scotland to pay £562.82 for a subsidy entitlement that should reap £306 a year until CAP is reformed.

Neil O’Brien, the director of Open Europe, said: “This is the final reduction to absurdity of the Common Agricultural Policy. Only the EU could have created a situation where people who are not farmers are paid not to farm.”

Farmers started trading subsidies between themselves last year, but the profitability of it has recently brought it to the attention of a wider range of investors. Mr Lane said: “There has been a lot more interest. Anyone who bought entitlements last year was laughing all the way to the bank. You’d get your money back in three years.”

Under EU regulations, only someone classified as a farmer can buy the right to receive subsidies, but to be classifed officially as a farmer, people need only hold a lease on a minimum of 1.7 acres for ten months of the year, and never need to visit it.

Scottish landowners are now leasing out vast tracts of rocky highland for as little as £5 an acre a year, so that investors can claim to be farmers. For each acre you lease, you can buy annual subsidies averaging £100 an acre, but which can rise to over £1,000 an acre.

Spencer Hayes, of the agricultural broker Hayes McCubbin Macfarlane, estimates that about 200,000 acres of Scottish highland and woodland are being leased to nonfarmers: “People are doing it massively. We have been leasing 100,000 acres simply to allow them to meet the European definition of farmer. The total market could be double that.”

Most people buying the subsidy entitlements are other farmers, but many are investors, including owners of hunting estates, who want their land to generate a second income. One estate owner, who wished to remain anonymous, told his local newspaper: “You can play this game like a stock market. What I would say is that we shouldn’t be here doing this; it is a crazy world.”

The trading of subsidy entitlements was fiercely defended by the National Farmers’ Union, which insisted it was essential for preserving the countryside.

A spokesman said: “Farmers couldn’t survive without subsidies. They ensure the beauty of the landscape is preserved.”

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