Statutory BNG credit costs, and a VAT trap

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.

Spatial Risk Multiplier

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 hectare2
Moderate condition – multiplier2
Habitat units per hectare4
Credits required to offset this with 10% gain4.4
Three hectares13.2
Spatial risk multiplier2
Total units needed if using statutory credits26.4
Price per unit£42,000
26.4 units1,108,800
VAT at 20%221,760

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.