derelict land Archives - London Chartered Accountants Blog

Environmentalist in protective suit working at a pollution site. Contamination of air, water and soil. Pollution factors like factory chimneys, old tires, plastic bottles, chemicals and other waste, all represented in the photo.

Now that property finance has become more readily available, our developer clients have significantly increased their activities. Naturally this is leading to discussions about tax reliefs on contaminated or derelict land remediation expenditure.

Land remediation expenditure can be subject to an enhanced deduction of 150% of the qualifying trading costs incurred by a company. Qualifying costs are those spent on cleaning-up harmful substances in land (contaminated land remediation relief) or removal of structures to allow the land to be put to productive use (derelict land remediation relief). The conditions for derelict land remediation relief are considerably more onerous than that of contaminated land remediation relief and therefore it is the latter relief which is the more common claim.

It had been announced in Budget 2011 that the contaminated relief would be abolished by 2012. However the Government then confirmed that it would be retained as its abolition was felt to impact the regeneration of otherwise uneconomic brownfield sites.

Staff costs

Contaminated land remediation relief gives an enhanced tax deduction for the costs of staff, materials employed and sub-contractors (including connected parties) who undertake remediation activities. For these purposes staff costs represent the earnings, pension contributions and Employers NIC of directors or employees who are directly engaged in the remediation. Time apportionment is possible, subject to deminimus levels, if the individuals are only partially engaged in the remediation work. Staff should be directly engaged in the activity and therefore support services, such as the costs of administrative departments, are not eligible for the relief.

No relief is available if it was the activities of the claimant (or person connected with them) which resulted in the initial contamination. Nor is a claim possible if there is a grant or subsidy offered to the claimant to do the work.

Timing

A company can only claim contaminated relief in the period in which the expenditure is deducted in calculating profits. This means that the deduction is only available in the period in which work-in-progress/stock is charged against profit. The HMRC manuals reiterate this point with an example confirming that relief is not available in an accounting period in which expenditure is charged to the balance sheet. Once that balance sheet sum is deductible against income the claim can be made.

The relief generates an enhanced tax deduction which can result in a tax loss. Tax losses can be used in the normal way or, if requested by the company, generate a repayment from HMRC equal to 16% of the qualifying loss.

Making a claim

However the relief is used, the enhanced tax deduction can only be recognised if a claim is made to HMRC. Most claims can be made up to two years from the period of the relevant accounts and therefore repayment interest can also accrue on sums paid by HMRC. HMRC are not obliged to make a repayment if there is PAYE/National Insurance owed to them or an enquiry into the company’s corporation tax return for the accounting period that is still open. However they can make a provisional payment of such amount as they feel fit.

In summary there are two enhanced deductions which a corporate developer can claim with contaminated land remediation relief being the common claim. This can reduce tax liabilities or generate tax repayments at a rate of 16% of the claimable sum.

Although it had been suggested that the relief would be abolished in 2012 this decision was reversed and claims are still possible.

Much has been written about Land Remediation Relief (LRR) and the closely related Derelict Land Relief (DLR). In a nutshell these can provide land owners and property developers relief for up to 150% of qualifying costs of “cleaning up” contaminated land – eg, spend £500,000 and get tax relief against a deemed spend of £750,000. It’s very appealing.

But as they say, all that glitters is not gold and there are a few significant hurdles to get over.

Firstly, the claimant has to own the land. We all know that many deals are done on the back of “options” – where the developer who has invested years (and funds) bringing a scheme together never actually takes ownership of the land. Does this therefore bar him or her from benefiting from this generous tax relief?

Secondly, the landowner must clearly identify the remediation costs. In its most basic form this would mean writing out a cheque for the clean-up, but things don’t always work in this way. The scarcity of development funding has increased the use of barter transactions which allow clean-up operations to be funded by non-cash means, for example, the extraction of minerals or topsoil from the site, or removal of metal structures for scrap value to name just two possibilities.

These make the reliefs seemingly impossible to obtain in certain situations. However, a good understanding of the mechanics of LRR and DLR can help immensely. For example – when negotiating the sale of the option, which may involve the upside of a share of surplus profits sometime in the future, it would be invaluable to know what level of tax relief the building contractor would be entitled to when they remediate the land. Similarly, careful advance planning of barter transactions can ensure that clean-up costs are properly identifiable, thus enabling the land owner to make a claim for tax relief.

Finally, these reliefs are Corporation Tax specific, and available only to Limited Companies. What this does is add yet another ingredient to the already complicated answer to the question “What business structure should we use?”