Have you acquired land which is either derelict or in a contaminated state and are you missing out on corporation tax relief? In this article, we look at Land Remediation Relief
These tax rules were overhauled a decade ago and can provide companies with valuable corporation tax relief if costs are either incurred in bringing derelict land back into use or removing contaminants from the land. Land includes the buildings on it and they must be situated in the UK. Land remediation relief is a potentially valuable relief that is often overlooked by property developers.
Land remediation relief is open to both companies undertaking trading activities and those running a property rental business. For those holding the land within fixed assets rather than stock, an election can be made in respect of capital expenditure, writing off the costs against taxable profits for the additional relief to be claimed. This relief applies to freehold land and leasehold interests of at least a seven-year period.
If the company or someone connected with it is responsible for the contamination/dereliction either because they have done something or omitted to do something, a claim will not be possible.
A company which is a member of a partnership may also be able to claim their relevant proportion of costs incurred by the partnership. Real Estate Investment Trusts are not excluded from making such a claim.
If the company is loss making, there is also a possibility of surrendering losses for a 16% tax credit. Note that this can have an impact on the cost of the land (where held as a fixed asset) when calculating any eventual capital gain in respect of an onward sale.
What do we mean by contaminated and derelict?
Land is in a contaminated state if there is something in, on or under the land that is causing or (there is a serious possibility) of causing harm. Harm includes; death, significant injury, and damage of living organisms; significant pollution of controlled waters; a significant adverse impact on the ecosystem, and structural/significant damage to buildings or interference that significantly compromises their use.
Land is not considered to be in a contaminated state by reason of:
- living organisms or decaying matter deriving from living organisms.
- anything present otherwise than as a result of industrial activity.
The presence of naturally occurring arsenic, arsenical compounds, Japanese knotweed and radon have been specifically included as qualifying.
The land is in a derelict state if it is not in productive use and it cannot be put into productive use without the removal of buildings or other structures.
The National Land Use Database (NLUD) classifies historic land use in England. HMRC will accept the NLUD as evidence as to whether the land is derelict. Land does not need to be on the NLUD to qualify, however.
What costs can be included in land remediation relief?
The costs must be such that they would not have been incurred had the land not been in a contaminated or derelict state. For contaminated land, qualifying costs can be grouped into:
- Costs of establishing the level of contamination;
- Staff or sub-contractor costs for those involved in the land remediation;
- Cost of materials used in the remediation works;
Landfill tax is not a qualifying cost.
For land in a derelict state, it must have been this way since acquisition or 1 April 1998 (if later). The costs must comprise the removal of the following:
- post-tensioned concrete heavyweight construction;
- building foundations and machinery bases;
- reinforced concrete pilecaps;
- reinforced concrete basements;
- redundant services which are located below the ground (services being pipes, wiring, tunnels, etc. used in relation to the gas supply, the water supply, drainage or sewerage, the electricity supply or telecommunications).
Example of Land Remediation Relief
A property development company acquires land for £1.5m incurring £300,000 on a mixture of qualifying remediation costs.
The area impacted is developed into a housing estate. Initially, the expenditure is included with the company’s work-in-progress. As the properties are sold, part of the qualifying costs is deducted and the associated 50% uplift can then be claimed.
Based upon current corporation tax rates, once the properties have all been sold, the company will have received an additional £28,500 of corporation tax relief for the remediation costs incurred.
If you believe this might apply to your company, bear in mind that a company has four years from the end of an accounting period in which to make a claim e.g. a claim for the year-ended 30/09/15 will need to be submitted by 30th September this year. A shorter (two year) time limit applies to treating capital expenditure as P&L costs and for claiming a repayable tax credit.