LAND REMEDIATION RELIEF – THE KNOTTY PROBLEM OF JAPANESE KNOTWEED AND OTHER LAND CONTAMINATES
It might appear strange to consider Japanese knotweed in the context of a tax article, however, knotweed (which is particularly invasive and destructive) is perhaps the only plant specifically referred to in many thousands of pages of legislation relating to the taxation of companies. Clearly an explanation is called for.
Land Remediation Relief (LRR) was introduced in 2001 to address market failure, in bringing back into use, land that had been blighted by previous industrial use by giving enhanced tax relief for the required clean up. It was extended in 2009 to provide similar tax relief for the costs associated with bringing back into productive use land blighted by long term dereliction.
As the focus has intensified on the redevelopment of brown field sites the relief is perhaps more relevant today than when it was introduced 17 years ago.
It should be noted from the start that LRR is only available to companies (including corporate members of an LLP) and applies to both capital and revenue expenditure.
Although the title of the relief would suggest that it is restricted to land this is not the case and buildings are also encompassed within the provisions.
The relief provides a deduction of 100% of the qualifying expenditure, plus an additional deduction of 50%.
Contaminated Land Remediation Relief Claims & HMRC Tax Manual CIRD60000
Where the LRR claim results in a corporation tax loss the element of the loss resulting from the claim can (like an R & D claim) be surrendered for a repayable tax credit. This is paid at the rate of 16% of the loss surrendered and can give a valuable cash flow benefit for a start up or a typical property development company where there is a significant front end cash burn in developing a new site.
In the heat of the sale negotiations the availability of the relief should not be overlooked, by both the vendor and the purchaser, and can influence the ultimate purchase price.
Land Remediation Relief For Developers & Connected Parties
Looking first at the rules relating to land contaminated by previous industrial use.
The rules are detailed but in overview land or buildings are in a contaminated state if there is contamination present as a result of industrial activity such that:
• it is causing relevant harm; or
• there is a serious possibility that it could cause relevant harm, or
• it is causing, or there is a serious possibility that it could cause, significant pollution in the groundwater, streams, rivers or coastal waters
“Relevant harm” includes significant adverse impact on the health of humans or animals or damage to buildings that has a real impact on the way the building is used.
Qualifying expenditure includes the cost of establishing the level of contamination, removing the contamination or containing it so that the possibility of relevant harm is removed. There is, however, no relief if the remediation work is not carried out.
The only restrictions are that a company is not entitled to claim where any of the following applies:
• the land is in a contaminated state due to the claimant company
• the claimant company does not have a ‘major interest’ (freehold or a minimum lease of 7 years)
• the expenditure has been subsidised, for example by grant funding
• the acquisition cost of the land was specifically discounted in order to account for the cost of remediation works and stated as such in the purchase agreement.
Thus, if the general principle is that the contamination must be caused by previous industrial use where does knotweed enter into the equation? In general terms expenditure on removing living organisms and other naturally occurring contaminates does not qualify for relief yet the cost involved in dealing with these matters can be significant.
It is for this reason that the legislation specifically brings within the scope of the relief the costs involved in cleaning up naturally occurring arsenic, radon and of course knotweed (other invasive plants do not qualify) .
To be regarded as derelict, the land must:
• be out of productive use, and
• be incapable of being brought back into productive use unless buildings or structures on it are removed.
To count as long-term derelict land, the land must have been derelict since the earlier of:
• When the site was acquired by the claimant company, or a connected party; or
• 1 April 1998.
Relief is given for specific and defined expenditure incurred in removing the following structures left from any previous occupation of the site:
• post tensioned concrete heavyweight construction,
• building foundations and machinery bases,
• concrete pilecaps,
• reinforced concrete basements
• below ground redundant services (gas, water electricity and telecommunications).
There are no stipulations on the use to which the site was previously put. Qualifying expenditure includes the cost of establishing what redundant structures are present and the cost of removing the structures listed above. There is, however, no relief unless the remediation work is carried out.
LRR can be an important tax relief when developing brown field site and the benefit of it is often not maximised.
Detailed analysis of the site will be undertaken at the planning stage, however, it is all to easy to forget to include your tax advisers in the initial project team, failure to do so can mean that the relevant tax information is not captured.
For more information on making a LRR claim or to talk to one of our chartered tax advisers about Land Remediation Relief please contact us.
You can also read more about property tax below.