A taxing incentive
Tony Llewellyn, partner at tax specialists Davis Langdon Crosher & James, looks at tax incentives to encourage the development of brownfield sites
The government recognises that to protect green belt land, most new development needs to take place on brownfield sites. However, the introduction of Landfill Regulations adds another hurdle to the development of contaminated sites. It is therefore worth looking again at the benefits and potential difficulties of taking advantage of the tax incentive provided by the government to encourage brownfield development, which was introduced in the 2001 Finance Act.
This incentive - known as land remediation relief - allows a developer to claim tax relief to the equivalent of 150% of costs which can be shown to be part of the decontamination of a site. The actual saving will depend on the trading status of the company, but it effectively provides a refund of up to 45% of clean up costs. This is a potentially significant cash subsidy, and yet there has been a relatively low take-up of what should be a major incentive to redevelop sites whose value has diminished as a result of contamination.Why the low take-up?
The problem with any incentive which involves tax is that it is invariably complex. The Chancellor may have responded to lobbying from environmental groups by introducing a fiscal incentive, but the more generous the tax incentive, the more the Inland Revenue will seek to limit its application. Yet this particular piece of tax legislation is unusual in that it is very broad ranging, allowing relief on expenditure of any remediation which "causes offence to the human senses". Furthermore, providing tax relief of 150% is virtually unprecedented in recent tax legislation, with only R&D allowances offering such a substantial saving. The legislation does have some restrictions. Relief is not available to the business that was the original polluter, thus eliminates a substantial proportion of contaminated sites owned by the large petrochemical, and utility companies. The relief is also only available to companies resident in the UK rather than individuals or partnerships.Is it worth the effort?
If a company has acquired a polluted site and is not the polluter, then the incentive should be considered when development is being undertaken. The legislation's unusual breadth of scope means that it is not merely the cost of the removal of contaminated material that qualifies, but all costs that can be directly attributed to the cost of remedying the effect of the contamination. For example, a project might include a soil remediation contract which costs £100,000. However, after adding the costs associated with the project - which might include backfilling, site set-up costs, site surveys and reports, fees and watercourse treatment - the total cost of this element of the project could be £300,000. This would create a tax saving of up to £135,000 The government has also confirmed that the removal of asbestos should also qualify within the remediation legislation. This extends the scope of the incentive beyond industrial sites, and is now relevant to the many thousands of refurbishment and commercial building projects undertaken annually in the UK.Planning ahead
The Inland Revenue, being ever more wary of tax avoidance, will insist on detailed supporting information to back up any LRR claim, including full expenditure records, any direct labour and material invoices, surveys, and environmental reports. The claimant will need to explain the reason for the removal of harmful materials, including method statements and remediation strategies that prove that the costs were necessary to prevent "future harm".
A predictable difficulty with any tax legislation as broad as land remediation relief is the resolution of a variety of grey areas that must be worked into Inland Revenue guidelines.
A good example is the question as to whether or not a buyer who acquires a site at a lower value reflecting the contaminated nature is technically receiving a subsidy, thus negating the ability to claim any tax relief. This is a matter upon which a lot of correspondence is being exchanged with the technical division of the Inland Revenue.
Despite the difficulties outlined above, land remediation relief is a valuable investment incentive which is intended to act as a significant lever to help kickstart development on problem sites. Despite the limitations set out in the statute, when compared to other fiscal incentives, the legislation has very broad scope, and is valuable enough to actually make a difference. It is certainly therefore worthwhile taking the time to understand the system and overcome the hurdles. Planning restrictions and government policy are going to continue to heavily restrict building on green field sites, so we might as well take up the offer of financial assistance while it is available.