ATT urges guidance on taxation of environmental schemes

22 November, 2023

The decision to delay a response on the tax treatment of a number of important environmental land management schemes could hamper their take-up, says the Association of Taxation Technicians (ATT).

The Government announced in today’s Autumn Statement1 that it would defer a response until Spring 2024 on implications around the Woodland Carbon Code, Peatland Carbon Code2, Biodiversity Net Gain (BNG)3 and nutrient neutrality4, land management schemes which are designed to create environmental benefits from long term, or permanent, land use change.

Landowners who put their land forward for these schemes are able to generate income from the sale of ‘credits’ based on the expected benefit of each individual scheme. However, a range of significant tax considerations around the environmentally beneficial schemes are currently unknown or unclear, preventing landowners from engaging with confidence.

Senga Prior, chair of the ATT Technical Steering Group, said:

“There is a pressing need for guidance on a wide range of tax matters relating to these schemes. On a UK-wide basis, the first credits generated from the Woodland Carbon Code have now been verified but landowners looking to sell these units are unsure how HMRC expects the proceeds to be taxed. Given the importance of reducing greenhouse gas emissions to achieve net zero, there needs to be clarity to ensure that markets in voluntary carbon schemes can develop.

“Another significant issue is whether or not land held in these schemes can continue to benefit from favourable agricultural property reliefs for inheritance tax purposes. HMRC published some helpful guidance in this area earlier this year, but we don’t believe it goes far enough to cover all the situations where entering a scheme might put the availability of reliefs in question and increase future inheritance tax bills.

“A common thread in all the feedback we have received is that uncertainty around the tax position is reducing the pool of individuals and businesses willing to engage with these schemes.

“As the UK strives to reach the net zero target, clear and possibly favourable taxation of these schemes could become an incentive for more landowners to get involved, making it easier for the UK to achieve this target.”

Notes for editors

  1. Paragraph 5.56 of the ‘Green Book’ confirms that the Government is still reviewing responses to the consultation which closed on 9 June. The consultation ’Taxation of environmental land management and ecosystem service markets Consultation and call for evidence on selected tax issues’ was published on 15 March 2023 and the ATT’s response is here.

  2. Landowners and tenants can generate carbon credits when they take action to remove from (or reduce emissions into) the atmosphere of carbon dioxide and equivalent greenhouse gases by changing how they manage their land. Such actions include planting trees or restoring peatland. Trees absorb carbon dioxide as they grow, while unhealthy peatbogs emit carbon dioxide, so restoring these areas can help to avoid future emissions. A single carbon credit represents the removal or avoidance of one tonne of CO2 (or equivalent greenhouse gases) emissions. Individuals and businesses can purchase these voluntary credits to offset their own emissions as part of steps towards net zero.

  3. It is expected that BNG will become a formal planning requirement from January 2024 (originally November 2023) in England, although some local authorities are already taking biodiversity considerations into account when making planning decisions. Developers looking for planning permission to build residential properties will need to calculate the loss of biodiversity as a result of the development and replace it with 10% more biodiversity through a mix of on and off site measures, including the purchase of ‘units’ or ‘credits’ from third parties.

  4. Additional house building leads to additional wastewater and sewage, which can increase levels of nutrients like phosphorous and nitrogen in local watercourses. High levels of these nutrients can be harmful to wildlife. Approximately 74 local authorities are already subject to nutrient neutrality requirements on some or all of the area under their control, and planning for residential developments cannot proceed without evidence that steps have been taken by, or on behalf of, the developer to reduce nutrient outflow by taking some compensating action elsewhere in the catchment area.