Stephen Berger from Baker Tilly looks at what tax relief is available for contaminated land development.As part of its drive to promote urban regeneration, the government has introduced a clutch of tax incentives. These include generous tax provisions for investors and developers of contaminated land, yet not many people are aware of them.
Companies developing or investing in contaminated land can claim the additional costs of remediation and a 50% rebate. This benefits investment and trading companies, as well as companies constructing commercial properties for their own use, since such capital expenditure would not normally qualify for a deduction, let alone cover 150% of the cost.
While property development companies would normally be able to obtain relief for the costs of developing land, including clean-up costs, they have the additional incentive of a free 50% uplift on these remediation costs.
This tax relief is therefore extremely valuable and may be a key driver in decisions to invest in or develop contaminated land. For investors, the relief may be worth up 45% of the cost, while developers get a 15% boost.
Those companies that do not have the profits to offset these increased allowances can claim a tax credit from the Treasury. This is equivalent to 24% of the actual cost - one of the few occasions when the Inland Revenue will pay you. Who is eligible?
A key principle of eligibility is that polluters cannot benefit - only those companies that acquire contaminated land are entitled to tax relief. The relief is only available to trading or investment companies, not individuals or partnerships (except corporate partners). Housing associations or charities will not generally be able to benefit as non-taxpayers. However, the relief may be available where developments are carried out through trading subsidiaries. What sort of development is eligible?
There is no restriction on the type of development. It may be commercial or residential, and includes buildings.What is contaminated land?
Land is contaminated if it is polluted by a substance on or under the land that may cause harm or pollute controlled waters. Substances can be natural or artificial, but the definition does not include animals, plants and insects. The harm must be to living organisms or ecological systems, or the contamination must be causing offence to human senses or damage to property. The contamination doesn't have to cause harm - the risk that it may do in the future is sufficient.What cost qualifies?
Qualifying costs must have been incurred by or on behalf of a company after 11 May 2000 and include:
- work to prevent, minimise, remedy or mitigate pollution;
- preparatory works on assessing the condition of land, provided works are subsequently undertaken; and
- costs of restoring land or buildings.
The relief is limited to the additional expenditure incurred because the land is contaminated. Any subsidies must be deducted. The relief must be claimed within two years of the end of the accounting period.Practical issues
Some companies use in-house facilities to carry out remediation works. This can cause problems, as any relief will be restricted to actual costs, with no further benefit from charging any intra-group profit.
Companies planning to acquire contaminated land sometimes purchase shares in a company, rather than acquiring the land directly. This will generally prevent the purchaser from obtaining relief, as it will have acquired the polluting company. When acquiring land from entities that cannot benefit from the relief, there may be benefits in purchasing the land in its contaminated state, cleaning up the land and claiming the relief.Contaminated buildings
The Control of Asbestos at Work Regulations 2002 impose duties to deal with asbestos in the workplace. Where this involves surveying and removing or otherwise making asbestos contamination safe, the new tax relief will be available. Where the property is damaged in the course of removing asbestos, tax relief will also be available to restore the property.
All eligible companies should consider claiming this relief, which should encourage the development of brownfield land and buildings. Tax rebates from government are rare - so claim them.