Progress towards clarity for taxation of environmental schemes welcome, says ATT

7 March, 2024

The Association of Taxation Technicians (ATT) has welcomed the announcement1 that the Government will be launching a new working group to clarify the tax treatment of several important environmental land management schemes. 

The Woodland Carbon Code, Peatland Carbon Code2, Biodiversity Net Gain (BNG)3 and nutrient neutrality4 are all 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, currently a range of significant tax considerations are unknown or unclear5, which is preventing landowners from engaging with confidence in these environmentally beneficial schemes.  

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

“We welcome the formation of this new group, as there is a pressing need for guidance on a wide range of tax matters relating to these schemes. The ATT helped to establish an independent group to progress these issues back in 20226 and we are pleased to see Government setting up a regular pattern of engagement with interested parties.“ 

“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.“  

“The changes to Inheritance tax reliefs announced are also welcome, as a common thread in all the feedback we have received is that uncertainty around the longer-term tax position is reducing the pool of individuals and businesses willing to engage with these schemes.” 

“As the UK strives to reach its net zero target, clear taxation of these schemes should make it easier for more landowners to get involved, making it easier for the UK to achieve this target.” 

The Government has also confirmed changes to Inheritance tax reliefs from April 2025 to ensure that land managed under an environmental agreement with, or on behalf of, the UK government, Devolved Administrations, public bodies, local authorities, or approved responsible bodies will be eligible for Agricultural Property Relief. 

Notes for editors:

  1.  The consultation response was published on 6 March 2024 as part of the Spring Budget documents.
  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. BNG became a formal planning requirement in February 2024 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.
  5. There is a lack of clarity and/or a need for rule changes on the VAT treatment of credits, the income tax or corporation tax consequences on the sale of credits, and various issues with SDLT/LTT/LBTT.
  6. The ATT is a founder member of the Natural Capital Working group which has been highlighting concerns about tax issues since July 2022.