Confusion over environmental tax rules could threaten net zero targets, warns ATT

The Woodland and Peatland Carbon Codes allow landowners and tenants to generate “carbon credits”¹ by reducing or removing emissions of carbon dioxide and other greenhouse gases, such as by planting trees or restoring peatland. Landowners who put their land forward for these schemes are able to generate income from the sale of these credits.

However, the ATT has warned² that unless guidance is clear on how the sale of credits is taxed, some landowners could be put off from making use of the schemes, with a knock-on effect for the Government’s ambitions to bring all greenhouse gas emissions to net zero in the next 27 years.

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

“In the UK, 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.

“A common thread in the feedback we have received from our members 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.”

The ATT has also called for clearer guidance on other environmental schemes with tax implications, including Biodiversity Net Gain (BNG)³ and nutrient neutrality.⁴

Senga Prior continued:

“There is a pressing need for guidance on a wide range of tax matters relating to these schemes. In England, with nutrient neutrality already in place, and BNG requirements to follow later this year, planning applications could be disrupted if developers are not able to find enough landowners willing or able to put land into these schemes due to uncertainties around tax.”

Notes for editors

1. 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.

2. 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.

3. 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. In some local authorities, planning for residential developments cannot proceed without evidence that steps have been taken to reduce nutrient outflow by taking some compensating action elsewhere in the catchment area.