It is very good news to see that HMRC have finally provided some long-awaited clarity with their note published yesterday on the taxation of ecosystem services including the BNG, Carbon and Nutrient Neutrality, although it also highlights the need to seek specialist advice in this complex area. The exact nature of taxation depends on the scheme and we only refer to mandatory services such as BNG and NN, not voluntary schemes which include carbon credits. These are some initial thoughts only and reiterate a tax expert’s advice should be sought before proceeding with any Natural Capital project. However do ring myself or Alasdair Squires if you have any particular query as we do get heavily involved in this aspect of the projects we manage for clients.
Are receipts capital or revenue?
Payments for ecosystem services will normally be treated as income payments and income of a trade. On a farm where activities are undertaken on the land to maintain the habitat and whether or not the land has other ongoing trading uses will be considered, including if it continues to be used as a farm and the maintenance of the habitat is part of the farming activities. For example, if a nutrient credit is generated through drainage improvement on a farm, which continues operating as a farm, the sale receipts will be trading receipts of the farm.
If the receipt is not part of a trade or property business and is a capital receipt, then the normal rules for computation of capital gains will apply.
Expenditure on setting up a Habitat Bank
- Payments for improving and adapting the land,
- Taking professional advice e.g. from Chartered Surveyors/project consultants, solicitors, ecologists, foresters etc
Tax treatment of expenditure will depend on what the person incurring the expenditure is using the land for. If it is being held for trading purposes, it is likely that, subject to the usual rules on allowability of expenditure, it can be set against the taxable income of the farming trade. Capital allowances may be available for capital expenditure incurred for the provision of plant or machinery, subject to the normal rules on expenditure will depend on whether the expenditure is on qualifying plant or machinery e.g. package treatment plants to replace septic tanks would be allowable compared to alterations to the land which would not be allowable.
Capital gains considerations on the sale of land
Where land which is held as a capital asset and is providing ecosystem services is sold, sale proceeds may be subject to capital gains tax (CGT) or corporation tax (CT) on chargeable gains. Subject to the normal rules for reliefs.
VAT
BNG Units are tradeable instruments therefore, where these Units are supplied by a taxable person in the UK, they are subject to VAT at the standard rate. Sales of statutory BNG Credits are outside the scope of VAT.
Inheritance tax on land
While each case is ultimately determined on its own facts, the creation of an environmental management agreement within section 124C IHTA 1984 should not in itself prevent land qualifying as conditionally exempt via agricultural relief.
Tax implications of stacking
Receipts and expenditure for each activity included in the stacking should be considered separately. Note this applies to BNG and NN. Carbon and other types of services are dealt with differently.
For further information contact Alasdair Squires or Hugh Townsend on 01392 823935 or bng@townsendcharteredsurveyors.co.uk