ATT welcomes wide-ranging call for evidence on carbon credits

The Association of Taxation Technicians (ATT) has welcomed today’s announcement of a call for evidence on the taxation of voluntary carbon credits¹ and called for greater clarity in the tax position of landowners who generate credits.

Landowners and tenants can generate carbon credits when they take action to remove from (or reduce emissions into) the atmosphere carbon dioxide and equivalent greenhouse gases by changing how they manage their land, such as planting trees or restoring peatland. A single carbon credit represents the removal or avoidance of one tonne of CO2 (or equivalent greenhouse gases) emissions.

The market in these credits, which includes carbon credits generated under the Woodland and Peatland Codes, is rapidly expanding but the tax position for landowners is unclear. The ATT has concerns that this ambiguity and potential loss of valuable reliefs could discourage landowners from taking part in these schemes.

Senga Prior, chair of ATT’s Technical Steering Group, said:

“There is a great deal of uncertainty over how existing tax rules should be applied to income from carbon credits and similar schemes. There is also concern that entering such schemes could put landowners at risk of losing valuable inheritance tax reliefs. This is a huge disincentive for farming families and acts as a significant barrier to more land going into schemes that could help reduce or absorb carbon emissions in the long term.

“We are pleased to see this wide-ranging call for evidence about the taxation issues arising from voluntary schemes such as the Woodland and Peatland code. We are also very pleased to see that the Government is willing to look at the issues around inheritance tax reliefs, as it is important that landowners are not discouraged from managing their land in an environmentally beneficial way.”

The ATT was one of the founding members of the Natural Capital Working Group, which has been meeting with HMRC to highlight the range of tax issues related to carbon credits and similar schemes to increase bio-diversity and reduce pollution from phosphates.

Senga Prior continued:

“Thanks to this call for evidence, everyone now has an opportunity to comment on issues that will affect not just landowners but wider society thanks to the benefits of removing carbon from the atmosphere.

“In addition to the established woodland and peatland codes, a number of new codes are being developed looking at the potential to store carbon in hedgerows, soil and the marine environment. There are also separate codes designed to increase bio-diversity and reduce harmful run off into watercourses. It is important that we have a clear understanding of the tax position so that, as new schemes emerge, landowners will have certainty over the tax consequences of their decisions.”

Notes for editors

- 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.

- As at December 2022, there were 1,825 registered projects for Woodland Carbon Credits alone, covering a total of 67,333 hectares of land. 

- The aim of these codes is to make various ‘green’ projects economical by creating an income for landowners taking part through verifying the climate benefits in the form of carbon credits. Businesses or individuals looking to offset their carbon emissions can purchase both verified credits where the removal has occurred or potential (future) credits where removal is anticipated in the future.

- The carbon credit market is still in its infancy, and the two most well-known codes at present are the Woodland and Peatland Codes. These voluntary codes are intended to provide assurance to purchasers of carbon credits that a removal or reduction of CO2 emissions has occurred. In the case of the Woodland Code, carbon is sequestered in growing trees, while for the Peatland Code, carbon reduction occurs through the restoration and enhancement of peat bogs. A healthy peat bog should be a carbon sink, but if poorly maintained, drained or damaged then a bog will instead release carbon.