Despite the withdrawal of the Landfill Tax exemption, does the proposed extension of Land Remediation Relief offer hope

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Much has been written about the 2008 Budget being a mixed bag of incentives and tightening of relief. This can be seen within the context of land remediation, where an additional Technical Note was issued on Monday, setting out the government’s plan to extend the relief to cover remediation of long term derelict land from 1 April 2009, whilst simultaneously withdrawing the exemption on landfill tax, with the deadline for final applications due at the end of this month.

At a time when the construction industry is experiencing a serious downturn the withdrawal of this exemption may act to deter remediation projects when renewed investment in construction and development is urgently required. However, more interesting is the government’s renewed focus on bringing derelict land and brownfield sites back into use.

Landfill Tax

Landfill tax was introduced in 1996 and is a tax on waste disposed of at authorised landfill sites in the UK. Currently the landfill tax is £32 per tonne and is set to rise by £8 per tonne per year at least up to 2010/11. Waste from cleaning up contaminated land has been exempt from landfill tax since the tax’s introduction with the intention that the tax would not be a barrier to development of contaminated land.

However, since 1996 there has been increasing EU wide pressure on governments to reduce levels of landfill and the withdrawal of the tax exemption must be seen in this context. It is clear that the withdrawal of the exemption is part of an increasing “green” agenda to reduce landfill.

The development of the government’s approach to land remediation is derived from HM Treasury’s consultation document “Tax incentives for development of brownfield land: a consultation response”, published last December. Consequently, the 2008 Budget announced the phasing out of the exemption by 1 April 2012 with 30 November 2008 as the deadline for new applications for the land fill tax exemption. In addition, all certificates awarded post 5 April 2008 have an end date of 31 March 2012.

Land Remediation Relief

Despite the immediate concern relating to the withdrawal of the landfill tax exemption, the Budget announcement this April significantly expanded the scope of land remediation relief that should provide a genuine incentive to companies to invest and remediate land that has been in a continuous state of dereliction since 31 March 1998.

Currently, land remediation relief provides relief from corporation tax through a deduction to profits chargeable to corporation tax at a rate of 150% of the qualifying expenditure.

The full criteria required for expenditure to qualify for land remediation relief is set out in full in FA 2001 Schedule 22. However, broadly speaking, qualifying expenditure must meet the following conditions:

* Is on land all or part of which is in a contaminated state

* Is on relevant land remediation directly undertaken by a company or on its behalf

* Is incurred on employee costs and materials or is qualifying expenditure on sub-contracted land remediation

* Would not have been incurred had the land not been in a contaminated state

* Is not met directly or indirectly by another party and is not subsided

* Does not attract any other form of tax relief.

Fundamental to claiming this relief is the requirement to prove that the land is “contaminated” which is currently restricted to land containing substances that cause or has the potential to cause harm to humans, ecosystems or water sources.

The purpose of land remediation relief has always been to encourage the redevelopment of brownfield sites. However, the requirement to prove that the contaminated land has proven restrictive. Consequently, the Technical Note published alongside the pre budget report has indicated that HMRC will publish guidelines demonstrating how current “good practice” risk assessments will act as evidence in proving potential risk of harm.

In addition, the 2008 Budget announced that from 1 April 2009 “Long Term Derelict Land Relief” will be introduced providing the same relief as available under Land Remediation Relief.

“Long Term Derelict Land” is understood to follow the definition enclosed within the Derelict Land Grant Act 1981 “Land or buildings so damaged by previous development that it is incapable of beneficial use without treatment”. However, the Technical Note indicates that HMRC plan to publish guidelines on their interpretation of “derelict land” in relation to Land Remediation Relief.

Potentially the requirement to prove that the land requires investment in order to provide beneficial use is easier than to prove that there is a risk of harm.

However, the definition is likely to restrict the scope of potentially qualifying expenditure to specific items that are:

a) directly linked to a derelict site,
b) items that are only required on derelict sites,
c) items which are of sufficient scale as to present a genuine blockage to development.

Within the Treasury’s consultation response, the government has indicated that incurring expenditure on the following is likely to qualify for derelict land relief:

* Removal of post tensioned concrete heavyweight construction;

* Removal of building foundations and machinery bases;

* Removal of reinforced concrete pilecaps;

* Removal of reinforced concrete basements;

* Below-ground demolition of redundant services;

* Fees directly relating to the above items.

In addition, the Government has also agreed to extend land remediation to specifically cover expenditure incurred on the treatment of Japanese Knotweed, but only where utilising on or off-site treatment methods as opposed to physical removal to landfill site.

It will be interesting to see how the final legislation will be worded and the scope to claim under this new relief. Considering the partial withdrawal of empty rates relief there is a clear message been sent to industry that they must regenerate existing sites.

Whilst this should be encouraged, we believe that the requirement that the land has been derelict since 31 March 1998, is too restrictive. Instead a 5 year period would be more reasonable as property between 5 and 10 years may require significant redevelopment to bring into use and would fall outside the long term derelict land relief scheme. In addition it will be interesting to see whether the 31 March 1998 date remains fixed or rolls forward, making a 10 year period the qualifying time rather than a fixed date.

However, ultimately the introduction of Derelict Land Relief will open up currently limited brownfield sites providing a real inducement to companies and potential opportunities to the construction industry that is of vital need at this time of economic downturn.

Michael Hunt
Bourne Business Consulting LLP