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Contaminated Land Tax Relief

Author

Robert Wilson

As a Senior Tax Manager, Robert works across all levels of the business to aid and abet the delivery of tax advice across ETC’s broad and varied client base. He has a particular interest in the tax affairs of owner managed businesses and the personal affairs of the company shareholders, including profit extraction, exit planning and family wealth preservation.

Who would want to live in a house like this? – when can contaminated land provide you with tax relief?

Depending on your opinion, you can often hear the words ‘tax’ and ‘toxic’ in the same sentence, but there is a little known scenario where you can hear these words used together and actually be on the receiving end of a benefit.

Imagine being in a situation like this. As a property developer, you have purchased a, what appears to be, prime piece of land with a view to obtaining planning for the development of houses or commercial buildings with a view to making a profit. Equally, a trading company may be looking to build specialist premises on a recently acquired site via knocking down an existing building to fulfil its expansion plans. In either case, you then go through the planning process only to discover that the land is contaminated and not fit for development in its current state.

This contamination can be as a result of a number of factors, more commonly though, we see the following issues: –

  • Asbestos within existing buildings, or, leached into the soil from previous works
  • Invasive and toxic weeds such as Japanese Knotweed
  • Radiation
  • Noxious underground gasses
  • Pollution from previous industrial activity on the site such as oil, fuel, sulphur, arsenic, mercury and other heavy metal contaminants
  • Underground reservoirs and tanks
  • Radon
  • and many more…

In any case, it can often result in significant expenditure being incurred in order to de-contaminate the land to bring it to a standard fit for building. At best, this can be a pain in the backside, at worst, this can significantly impact on projected profits and may even result in the plans becoming unviable.

Whilst any lawyers reading this may be rubbing their hands with glee (or drowning their sorrows depending on what side of the deal they worked on) at the prospect of potential litigation in a case like this, we tax advisors can provide some immediate benefit to a client using a little known relief properly referred to as “Land Remediation Relief” or informally “Contaminated Land Tax Relief”.

Where applicable, this can result in an enhanced deduction for expenditure when calculating profits, or, for loss making businesses, can result in a tax refund from HMRC!

Who can claim the relief?

Critically, Land Remediation Relief is a corporation tax relief. It is available where companies acquire land in a contaminated or derelict condition.

The relief is not available to individuals or partnerships. But, a company that is a member of a partnership can make an election in respect of its share of the partnership’s land remediation expenditure provided it satisfies the relevant conditions.

However, if the company itself is responsible for the contamination, then it cannot claim for this relief.

What relief can be claimed?

It is important first to distinguish between those additional costs incurred in bringing the contaminated land into a state fit for building and those costs which would ordinarily have been incurred for the building project.

Once these have been identified, an additional 50% of these costs may be put through the corporation tax return as an expense (on top of the full 100%), therefore reducing the profits subject to corporation tax, in the case of a property development company.

For other profitable trading companies, 150% of the qualifying expenditure may be claimed. This is because, for trades other than property development, expenditure such as this would normally fall within the capital allowances regime and is therefore subject to separate rules.

If a UK company makes a loss for an accounting period in which it incurs expenditure on remediating contaminated or derelict land, it may elect to receive a payable credit from HMRC. The amount of tax credit which can be claimed is 16% of the qualifying LRR for the accounting period the claim relates to. The cash return is equivalent to 24% of the expenditure incurred (16% x 150%).

Usually, a claim would be made within the accounting period within which the expenditure is incurred, however, retrospective claims are available on expenditure incurred within two years from the year end within which the expenditure was incurred.

What are the conditions?

The owner must have acquired the land in a contaminated state (i.e. the polluter cannot benefit) and have acquired it for the purposes of its trade.

The expenditure must be incurred for the purpose of:

  • Preventing, minimising, or remedying the harmful effects arising from the land being in a contaminated state; or
  • Restoring the land to its former state.

The expenditure must also satisfy certain conditions for the additional relief to be obtained:

  • It must be on land, all or part of which is in a contaminated state.
  • It must be on relevant land remediation directly undertaken by the company or on its behalf.
  • It must be on employee costs, materials or qualifying expenditure on sub-contracted land remediation.
  • It would not have been incurred had the land not been in a contaminated state.
  • It cannot be subsidised
  • The company must own a major interest in the land or building (i.e. the freehold or a lease longer than 7 years)

How can ETC Tax help?

Whether you are a taxpayer or their advisor, ETC Tax have experience of making Land Remediation Relief claims and all aspects relating to general property purchase and capital allowances. We are often involved post completion of the transaction itself.

Preferably though, if we were to be involved within the early stages of the acquisition itself, we can identify the possibility of Land Remediation Relief and provide appropriate advice thereby giving our clients a great degree of clarity prior to making the decision to agree terms with the vendor.

For more information, please get in touch.

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