The taxation of environmental land management and ecosystem service markets

The ATT has recently responded to the HMRC and HMT consultation on Taxation of environmental land management and ecosystem service markets: Consultation and call for evidence on selected tax issues (‘the Consultation’) issued on 15 March 2023. 

The Woodland Carbon Code, Peatland Carbon Code, Biodiversity Net Gain (BNG) and nutrient neutrality are all land management schemes which are designed to create environmental benefits from long term or permanent land use change. The Woodland and Peatland Carbon Codes involve planting trees or restoring peatland with a view to removing or reducing the amount of harmful greenhouse gases such as carbon dioxide in the atmosphere, while BNG and nutrient neutrality are measures designed to ensure that residential developments make a positive net contribution to biodiversity and do not increase pollution from wastewater. 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.

ATT's response to the consultation highlighted the need for both certainty and consistency in the tax treatment of these schemes. At present, there is little to no consensus on the treatment of some quite fundamental questions, including the effect of the schemes on Inheritance tax reliefs such as Agricultural Property Relief and Business Property Relief and whether the sale of credits should be income or capital. Although VAT was noted as specifically out of scope of this consultation, we also commented that existing HMRC guidance in this area is out of date and not reflective of the significance of the current markets. 

It is likely that discussion will continue in these areas over the coming months, and any additional feedback, comments or examples of situations where the lack of clarity on the tax position is causing concern would be welcome to [email protected].