supporting sustainable growth
I am very proud to be listed as an author of the Environment Industry Commission’s (EIC) new publication on Nature and Biodiversity.
My part of this was in the legal and policy overview section examining the history and intent of UK and international policy moves to use Natural Capital as a framework to judge progress on moving towards better environmental behaviours. In England this has given birth to Biodiversity Net Gain, which is looked at in some detail.
It is available here:
I was asked to comment on practical experience and taxation aspects of Biodiversity Net Gain . . .
I am starting to get a lot of enquiries about how income and expenditure for the various ecosystem service offsets are taxed. In this short piece I am going to restrict myself to Biodiversity Net Gain (BNG) introduced by the Environment Act 2021.
Biodiversity Net Gain was formally introduced to us in the Environment Bill which was laid before Parliament in January 2020, more than 4 years ago, but anyone who was awake would already have known this was coming as the direction of travel had been clearly signposted, not least in Gove’s 25 year plan. HMRC have therefore had a lot of time to get to grips with how it works and to establish the tax treatment of the various payments under the scheme.
I was pleased that they finally woke up to it in March 2023 when the consultation was launched after 3 years of sleeping, so I was excited to hear their thoughts. But the responses that HMRC give in their recent update on this have made me fall off my chair.
After a whole year of thinking about this all they can say can be summed up in the following two extracts, first from paragraph 2.6
The absence of accounting standards was raised as a key issue, given its potential implications on tax reporting.
Now from paragraph 2.7
There was a consensus amongst respondents that HMRC should issue guidance, including worked examples, to provide clarity on the tax treatment of the production and sale of ecosystem service units.
So..why not issue guidance? HMRC have now been sleeping on this for more than 4 years and I think we deserve better. I have clients who are making large scale investments without knowing the tax treatment of money being spent, and this is a massive failure of policy. This is a government supported investment and taxpayers are entitled to know how the various components are taxed.
HMRC are slow to provide help and advice, witness the difficulty in trying to talk to them, but very quick to charge penalties on hapless taxpayers confused about our labyrinthine tax system – hence the rather beautiful picture of the sleeping tiger above.
Rant over, for now…
Photo by Avel Chuklanov on Unsplash
As we draw closer to November, when Biodiversity Net Gain becomes a statutory part of the planning process, the component parts are starting to fall into place, sometimes with a resounding thunk. We have a new part of the jigsaw today, and there may be a VAT surprise for some.
Yesterday saw a release by Defra of a significant update on where we are with these rules. Additional funding has been allocated and some new information has been provided about how the statutory credits will be valued. This information is available here.
The cost starts at £42,000 per credit for units of habitat of low distinctiveness and increase up to £125,000 for units representing habitats of high distinctiveness but with a special high price of £650,000 per unit for high distinctiveness lakes. Linear habitats have a value of £44,000 per credit for Hedgerow and £230,000 per credit for river.
And a confirmation that these are taxable and standard rated for VAT, so VAT will be added to the invoice for statutory credit purposes.
A “spatial risk multiplier” is applied when offsetting units offsite. This is a mechanism to motivate new habitat creation close to where the development is. It is set at two when using a statutory credit.
It is important to remember that the statutory credits are only for when offset is not available either on site which is usually preferred, or offsite in the local area. The priorities will be determined by local nature recovery strategies, most of which has not yet been published. Indeed, experience suggests that these might not be available for another year or so in some cases, a long time after the rules come into place.
A lot has been written about biodiversity net gain so I don’t feel the need to add to this here, but instead I will run through a very simple example to show how this works in outline.
A developer is developing on 3 ha of modified grassland which is of low distinctiveness, but moderate condition. There is no strategic significance multiplier (which could increase the amount of units by up to 15%) in this case.
Assuming a packing ratio of 20 houses per hectare and a selling price of £200k per house. The expected total sale proceeds will be £12m.
Assuming the habitat will all be destroying as part of the development process, the units required are as follows
| Distinctiveness low. Units per hectare | 2 |
| Moderate condition – multiplier | 2 |
| Habitat units per hectare | 4 |
| Credits required to offset this with 10% gain | 4.4 |
| Three hectares | 13.2 |
| Spatial risk multiplier | 2 |
| Total units needed if using statutory credits | 26.4 |
| Price per unit | £42,000 |
| 26.4 units | 1,108,800 |
| VAT at 20% | 221,760 |
| Total | £1,330,560 |
This represents a substantial fraction of the total sale price of £12m.
As can be seen in the example above, there might be significant amounts of VAT paid when offsets are made using statutory credits. It will therefore be important to consider what VAT outputs there will be in respect of the land.
As a general rule for building projects the first sale of a major interest in land in brackets (freehold or lease over about 20 years) will give rise to a zero rated output, and therefore this will be available as input tax.
If land is being let to a tenant the rent will be exempt and unless the land is opted to tax input tax will be restricted. Even with an option to tax, residential lettings will often be excepted from the option, so we are back at the starting point. However, there are ways of reducing VAT on building costs on that can be explored. Specialist VAT advice should be taken on this, and I will be happy to point you in the right direction for this.