Biodiversity Net Gain – where are we?

These schemes are both much longer term than the essentially temporary three-year actions within a Sustainable Farm Incentive (SFI) agreement. BNG agreements typically run for 30 years and NN can be as much as 90 years. NN agreements will normally only be available within specified river catchment areas and are designed to reduce or eliminate the runoff of agricultural nitrates and phosphates into the drainage system and ultimately the supply of drinking water. The logic is that, even though the sums involved in a NN scheme can be high, it is still cheaper than trying to remove the contaminants at a later stage. Since the schemes involve an almost complete ban on fertilisers and pesticides, the land can only be used for the most extensive of farming activities for, effectively, three generations. As such it is almost like selling the land on a long-term lease (but for a price well in excess of agricultural value). No formal pronouncement on the tax treatment of such transactions has yet been given by HMRC but Natural England have stated that HMRC will regard some NN deals as being subject to CGT.

BNG schemes are rather more common and more complex. BNG credits are linked to building developments and the principles are that, since February 2024, there is a requirement for 10% BNG on developments which the developer must either self-provide or purchase elsewhere (either by private arrangements or as statutory credits). From November 2025, this will also apply to nationally significant projects. Typically, farmers will be offsite providers, possibly through a third party.

To secure the credits, the creator must establish an environmental “baseline” and then create a sufficiently favourable environment to achieve the net gain. This is likely to involve, for example, the creation of meadows, wetlands, scrub and woodland. The new habitat must be managed for the duration of the scheme.

While such schemes are not as permanent as an NN contract, they nonetheless will involve the withdrawal of the land for production for a generation and will require considerable expense at the end of the contract (redrainage, scrub clearance etc.) if the land is  to be restored to farming. It would appear that the value of a BNG contract may be well in excess of the current agricultural value of the underlying land.

Aside from the practical decision, the tax consequences will need to be considered. This becomes more complex: there seems to be a general consensus that BNG contracts will normally be treated as income and the sale of land on which BNG contracts are running will be subject to CGT. However, the recognition point for the BNG income will very much depend on the nature of the individual contracts. If arrangements are such as to constitute a lease, existing rules will apply. Otherwise, the HMRC view currently seems to be that the recognition point is an accountancy issue (and hence determined under FRS 102). This is likely to involve the detailed examination of the contract to decide at what point the entity satisfies its performance obligation – is it when the BNG credit is created or is it when each annual management plan is completed? Notwithstanding that the whole payment is usually made up-front, the alternative treatments could mean that the income is recognised over the thirty-year period. It is also anticipated that, where BNG income is treated as part of farming profits, the cash basis of recognition will be the default (subject to the normal option to elect for normal accounting treatment).

Where there are multiple landowners forming a single BNG scheme, there will often be a Special Purpose Vehicle to run the scheme which may create further complications and is likely to involve tax charges both within and outside the SPV.

The tax issues are currently under discussion with HMRC as part of the ongoing consultation following the 2023 Budget. A draft guidance note is expected in September, with final guidance following by December.