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Green issues

Author: David Missen & Will Nixey

Published: 17 Apr 2023

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Green issues have been very much in the news recently and are likely to assume a greater importance in future. In the next two articles, David Missen and Will Nixey look at different aspects of the issue. These also need to be read in conjunction with the article on the Budget announcement of a "call for evidence and consultation".

Green farming and the accounting and tax treatment

“Green farming” was a fundamental part of the thought process behind the “Health & Harmony" consultation which was published in February 2018 and which framed the Agriculture Act 2020 and the process of subsidy reform which is now underway. The intention is to leave the soil, air and water in a better condition than it has been previously, and positive outcomes will also be carbon capture (reducing CO2 emissions), more efficient use (and ultimately replacement) of fossil fuel, a more attractive and wildlife friendly environment, reduction in greenhouse gases and cleaner natural resources. All this has given rise to the concept of “natural capital”:  difficult to define, even harder to quantify and currently impossible to monetise directly since it looks at the capital value of “public goods”.

The fact remains that ultimately farms will need to get to “net zero” where carbon output is matched by carbon capture. This will involve changes in behaviour and changes in operations, with techniques such as driverless or electric tractors, precision sprays and fertiliser application, drones to monitor yields, and controlling diseases and pests and ultimately a revolution in agriculture on a par with other landmark changes over the last two millennia.

In the meantime, it may be helpful to consider those changes which are now taking place and what might be the accounting and tax considerations, bearing in mind that decided cases on this area are few, so some of the following is somewhat speculative.

Existing farm subsidies

The recognition criteria for Single Payment is well known and will follow FRS 102/5, the key point being that there should be no recognition until there is reasonable assurance that the entity will comply with the grant conditions AND the grant will be received, then the grant will be measured on the “performance model” or “accrual model” for FRS 102, and accruals only for FRS 105.

Where grants are received under the Countryside Stewardship (CS) scheme, the application needs to be considered in some detail since each component might have particular conditions which, in some cases, will extend past the financial year. In practice, the payments of CS have been irregular and hard to follow and many businesses will have adopted a “cash basis” of recognition – which, given the lateness of payment has probably roughly matched the point at which the grant has been earnt – ie the payment for calendar year 2021 was received in April 2022, by which time most of the land management conditions had been met.

Care will be needed in future. The 2022 CS payments seem to have mostly been made in December 2022 so some businesses may have received two such payments in a single year.

Often immaterial CSS capital payments will be matched against capital expenditure for the purposes of capital allowances (particularly by unincorporated entities) but, strictly for accounting purposes, FRS 102 again comes into play, requiring the grant to be recognised over the useful life of the assets involved – effectively the grant is capitalised and released to P&L over the life of the asset (FRS 102 para 24.5f). Where expenditure is required to “earn” the grant, it would follow that this would reduce the net value of the grant and effectively would also be written off over the useful life of the asset.

With effect from December 2024, the BPS payments will be replaced by “delinked payments” and it will no longer be necessary to hold Basic Payment Entitlements, which will become worthless in 2023/24. Where these have been purchased in the past, there will presumably be a CGT loss as the assets become “of negligible value”. More problematic will be those cases where entitlements have been inherited – it seems that the value of entitlements, whether owned by an individual or a partnership, have often been ignored for probate purposes but they clearly will have had a value at the date of death, and research may be needed to establish and claim this for use or carry forward.

Green costs and “rewilding”

Capital costs for air and water improvement, such as slurry stores, will generally attract capital allowances – where parts of the equipment are not an integral element of the plant, some may fall into SBA rather than AIA (although, in the light of current thinking on air protection, there is a strong argument that anything which is required to meet environmental conditions must be an inherent part of the processing function).

Rewilding – if carried out on in-hand land as part of an environmental scheme and where government grant income is received, FRS 102 will apply as above. Costs will be allowable for income tax but may require accrual to match with any grant income received. If there ls little or no government grant income then one would assume routine expenditure will be in the nature of “repairs” if the rewilded land is part of a wider farming enterprise.

For the purposes of Inheritance Tax, rewilded land will not necessarily be eligible for APR as it becomes “wild”. Initially it will still meet the “agricultural land or pasture” definition within s155 IHTA but will be unlikely to do so after several years. If it is in a funded scheme or part of a larger enterprise it will arguably still qualify for BPR as part of a trade (though not necessarily the trade of farming). It seems unlikely that an unfunded scheme would qualify for either APR or BPR unless such land is in future added to the conditions in s124c. The rationale behind this approach is that, when s124c was drafted, the parliamentary draftsmen must have felt that land in environmental schemes would not qualify for relief unless it was specifically covered within its own subsection. The treasury has an option to add habitat schemes to the s124 list but has not done so for many years. Where current schemes are closely identified with, or successor to those specified in s124, one could argue the point but new initiatives well outside those listed seem more problematic.

If let land is rewilded, the BPR route for the landlord will be blocked since s124 only applies for APR. APR will apply initially but may disappear as land loses agricultural value and also  becomes unsuitable for agricultural use. Perversely, as the land becomes more wild the market value may rise, reflecting its value for amenity purposes but, at the same time, the agricultural value will fall as the possibility of recovering it for agriculture becomes both remote and expensive.

Where rewilded land is used as part of wider entity and e.g. where BNG land is required in order to obtain planning permissions, APR will be available for ag value initially but BPR on the excess. Maintenance costs will presumably be wholly and necessarily for the main trade but some expenditure may need to be capitalised.

It is clear that where alternative uses for farmland are considered, the IHT implications need to be factored in.

Receipt of capital sums for Biodiversity Net Gain (BNG) arrangements

Under a BNG agreement, a landowner (or sometimes a tenant of the landowner) may receive a capital sum for putting land into an environmental scheme. Typically this will accompany an associated land sale and, as part of that sale, the purchaser will require the vendor to earmark land for environmental purposes in order that certain obligations can be met under the terms of the purchaser’s planning consents. How is this treated?

  • Is it a lease? If so the rules on lease premiums will apply – part capital/part income, see HMRC PIM 1205.
  • Is it a contracting agreement? There may be elements of both lease and contracting which need to be taxed separately. The contracting element may have a VAT liability and would probably need to be accrued over the life of the arrangement.
  • Is it compensation for profits foregone by the landowner or tenant? Accounting treatment would suggest accruing the receipt over the period of arrangement and VAT would follow the treatment of the underlying lost profits – probably zero rated if the land has hitherto been used for farming purposes.

The forgoing analysis is based on the facts of cases which have occurred in recent months. Such arrangements are still in their infancy but they are likely to become more frequent in future. Each case will probably be different and seeing the underlying agreement is essential.

Notes regarding the accounting and tax treatment of Biodiversity Net Gain (BNG) units

Biodiversity Net Gain (BNG) is an approach to development land and marine management designed to leave biodiversity in a measurably better state than before the development took place.

Ideally, BNG units (sometimes referred to as ‘credits’) will be delivered on the development site (on-site units) but this is not always possible. Where this is not possible, BNG units can be delivered off-site (off-site units) through the creation or enhancement of habitats with public and private landowners. Land used to deliver BNG off-site needs to be secured for a minimum of 30 years and formally registered on the Biodiversity Gain Site Register.

The CLA reported in October 2022 that the Government is arranging for the supply of a number of ‘statutory credits’. These will be delivered through land management projects which Natural England will endorse and which show improvements to the biodiversity value of the site, and will be available for developers to purchase at a set price directly from the Government.

It would appear that all land delivering BNGs needs to be managed, monitored and reported on for the duration of the net gain agreement. Some local authorities seem to have suggested values of £10,000 to £12,000 per BNG unit but DEFRA have suggested £25,000 per BNG unit. It is anticipated that some habitats will achieve several units per hectare.

Delivery models

There are various ways the BNGs can be structured but broadly these condense to three delivery models:

  1. Direct model – The Landowner sells or leases land to a Developer for its BNG value potential. The Developer creates, delivers, maintains and monitors BNG habitat over the 30+ year term.
  2. Self-delivery model – The Landowner creates, delivers, maintains and monitors BNG habitat over the 30+ year term. The Landowner sells units generated to the Developer.
  3. Third-party delivery model – The Landowner leases land to a habitat bank provider/fund for minimum 30 year term. The habitat bank provider creates, delivers, maintains* and monitors BNG habitat over the 30+ year term and sells units generated to Developer, seeking to make a profit.

* The habitat bank provider might also pay the Landowner, as a sub-contractor, to maintain and monitor BNG habitat over the 30+ year term.

Tax treatment

There is currently no specific guidance from HMRC on the tax treatment of BNG payments and reliefs, so the advice below uses general principles of taxation which we would expect HMRC to follow. The CLA and other organisations are trying to agree the accounting and tax position with HMRC so there is a definitive guide but it appears that we are several months away from a conclusion on this.

Obviously, companies pay corporation tax on revenue profits (income of a revenue nature less allowable expenses) and on gains on disposals of capital assets. If a capital asset was owned before December 2017, a company can also benefit from relief for inflation until that date.

Individuals (including partners in general partnerships, limited liability and limited partnerships – LLPs and LPs) pay income tax on revenue profits, and national insurance contributions (NIC) to the extent that income is deemed to arise from trading rather than (property) investment. They pay capital gains tax (CGT) on gains on disposals of capital assets.

Trustees pay income tax on revenue profits and capital gains tax on gains on disposals of capital assets.

1. Direct model

Here the Landowner sells land carrying BNG value potential (rather than realised BNG units) to the Developer. The Developer creates, delivers, maintains and monitors BNG habitat over the 30+ year term – the Landowner is not carrying the risks associated with this.

Sale of land with BNG value potential

Where an asset once sold is no longer available to the original owner, it is generally a capital disposal and subject to the appropriate tax on capital gains (corporation tax for companies, CGT for individuals and trusts).

The sale of land to the Developer would be subject to tax on capital gains. Where there is a sale of land which value is inflated due to the associated BNG unit potential, that would fall to be part of the land value and subject to tax on capital gains.

Lease of land with BNG value potential

A 30-year lease would be defined as a short lease for tax purposes. A short lease is one with a remaining term of 50 years or less at the date of its disposal. A number of special rules apply to the disposal of a short lease.

When a property investor grants a lease, this is sometimes done on the basis that the tenant pays a premium for the initial grant of the lease, in addition to also paying rent over the term of the lease. BNG unit potential leased along with land would appear to be similar to a lease premium, suggesting the tax treatment would be similar.

Where a short lease is granted out of a freehold or long lease (that is a lease with a remaining term in excess of 50 years), there are two particular rules which must be applied:

  • part of any premium paid will be chargeable as income, and
  • a special rule is applied to calculate the base cost of the lease granted.

The premium paid is likely to be an allowable expense to the person acquiring the lease for the purposes of their trade, deductible over the lease term.

2. Self-delivery model

This is where the Landowner creates, delivers, maintains and monitors BNG habitat over the 30+ year term, carrying the risks associated with this. The Landowner then sells the BNG units they have generated to the Developer.

This suggests there is an activity in the nature of trade which, alongside a profit motive, suggests the Landowner is taking revenue rather than capital receipts, and incurring allowable expenses.

To the extent that the realised BNG unit is associated with a regular future income stream, HMRC would probably view the sale of a BNG unit to be the exploitation of an asset for profit, with revenue profits subject to the appropriate tax on income (corporation tax for companies, income tax for individuals and trusts).

If the income received has the nature of compensation for the loss of farming income, one could argue this is farming profit i.e. trading income, and subject to tax on income (and national insurance contributions if the recipient is an individual). This would be relevant when considering farmers’ averaging of profits and could be helpful if the ‘hobby farming rules’, which historically have stated that a profit must be made every six years, come into play.

If the income arises from the commercial management of land with a view to a profit, it would form part of the taxable profits from that trade (akin to peatland management schemes which are commercial and profitable) and be subject to tax on income and NIC if the recipient is an individual.

Otherwise, regular income from a land based BNG unit would be property income and subject to tax on income (but not to NIC).

3. Third-party delivery model

This model is where a Habitat Bank provider creates and delivers the BNG habitat over the 30+ year term. The Landowner may be engaged to maintain and assist with the monitoring of the BNG habitat but, as a sub-contractor, would probably not be carrying the risks associated with BNG habitat delivery.

The Landowner’s sale of the land with BNG value potential to the Habitat Bank provider would be taxed in line with the rules outlined under the direct model (as above).

The Habitat Bank provider’s sale of BNG units to the Developer would be taxed in line with the rules outlined under the self-delivery model (as above).

If the Habitat Bank provider engages the Landowner as a sub-contractor to maintain and assist with the monitoring of BNG habitats, that would be an allowable expense to the Habitat Bank provider, and the receipt would be subject to income tax (and NIC if they are an individual) in the hands of the Landowner.


For VAT, one needs to decide whether there is a supply of goods and/or services which would fall within the VAT rules, affecting both VAT on the sale of BNG units and the ability to obtain relief for the associated input VAT.

The sale or grant of a lease of 30-years in land will normally be an exempt supply unless there is an option to tax over the land, in which case the standard-rate of VAT will apply.

There is also a need to consider whether the supply of BNG units alongside land represents a mixed or a composite supply for VAT purposes. This is relevant where each of those supplies is taxable at a different VAT rate. The mixed supply rules would apply where the BNG units are capable of being sold independent of the sale of the land and require the consideration to be apportioned between the BNG units and the land. The composite supply rules would apply where the BNG units are an ancillary supply to the principal supply of the land and require VAT at the rate applicable to the principal supply, which is likely to be the land. The supply of land is usually VAT exempt as mentioned above.

It is conceivable that the reverse could be true in areas where the value of the land is materially lower than the value of the BNG units on it. Here, the land would be an ancillary supply to the principal supply of the BNG units, making the consideration subject to VAT at the rate applicable to the principal supply of the BNG units. There is no guidance at the moment but the supply of BNG units by themselves, or as the main supply, is probably outside of the scope of VAT.

HMRC accepts that lease obligations to which tenants are normally bound do not constitute supplies for which inducement payments on entering leases are considered. As a result, HMRC believes that inducements to tenants to take leases and to observe the obligations in them should be outside the scope of VAT. However, there is a VAT taxable supply where a payment is linked to benefits a tenant provides to a landlord that are outside the normal terms of the lease. It remains to be seen whether HMRC will deem the return of biodiverse habitat to a landlord at the end of a 30-year lease as the tenant supplying a specific benefit to the landlord.

*The views expressed are the author’s and not ICAEW’s.