ALLISON PLAGER explores the little publicised relief available for expenditure on remediation of contaminated land.
Many a parent resorts to bribery to encourage their recalcitrant offspring to tidy their rooms. In a manner of speaking this is what the Government has done in respect of contaminated land. Although in this instance, the money is not given to the one who created the contamination, rather the one who performs the cleaning up operation.
ALLISON PLAGER explores the little publicised relief available for expenditure on remediation of contaminated land.
Many a parent resorts to bribery to encourage their recalcitrant offspring to tidy their rooms. In a manner of speaking this is what the Government has done in respect of contaminated land. Although in this instance, the money is not given to the one who created the contamination, rather the one who performs the cleaning up operation.
Dirty money
Contaminated land is not likely to sound an attractive acquisition proposition to most taxpayers. It is unlikely to be in the choicest of locations and, regardless of that, the purchaser is going to have spend considerable money in rendering the land suitable for use. However, businesses are always after land and, given the right incentive, contaminated land may suit.
So given that there is contaminated land available, that there are purchasers who are prepared to clean it up provided that it does not cost them too much, and that, overall, unused land is not abundantly available on our tiny island, the Government decided to do something about it. In the last Budget, Gordon Brown decided to make relief available to purchasers of contaminated land. Details are contained in Schedules 22 and 23 to the Finance Act 2001.
Firstly, a company can elect for capital expenditure incurred on remediation of land acquired for use in its trade or Schedule A business to be allowed as a deduction in computing the profits of that trade. So even if all the relevant costs represent capital expenditure, they will be allowed against profits. Secondly, land remediation relief of 150 per cent of qualifying revenue expenditure on remediation of land acquired for a Schedule A business or trade has been introduced.
Deduction for capital expense
Companies are entitled to the relief if the following conditions are satisfied:
- the land must be in the United Kingdom, and have been acquired for the purposes of a trade or Schedule A business carried on by a company;
- at the time of the acquisition, all or part of the land must have been contaminated;
- the expenditure incurred by the company must be capital expenditure on qualifying land remediation.
The primary legislative provision (paragraph 1 of Schedule 22 to the Finance Act 2001) refers only to land acquired for the purposes of a trade. The extension to Schedule A businesses is in paragraph 1 of Schedule 23.
The deduction will be allowed in the accounting period in which the expenditure was made, and is available for expenditure incurred from 11 May 2001. It is not retrospective, nor can it be given on expenditure subject to a capital allowances claim.
Unsurprisingly, the legislation prevents the deduction where expenditure is 'wholly or partly as a result of any thing done or omitted to be done at any time by the company or a person with a relevant connection to the company'. So, in effect, a company cannot get a reduction for clearing up its own mess. While this initially may seem fair enough, it gives no incentive for companies which have contaminated land to clean up their act. Perhaps this is an area which could be addressed in the future.
In order to obtain the deduction, an election must be made in writing to the Revenue within two years following the end of the relevant accounting period.
What is contaminated land?
Contamination probably means many different things to different people, but for the purposes of the legislation, land is contaminated if it has substances in, on or under it which causes or might cause harm, or if there is a danger of pollution in controlled waters. Nuclear sites are not included.
More specifically, paragraph 31 of Schedule 22 to the Finance Act 2001 defines substance as 'any natural or artificial substance, whether in solid or liquid form or in the form of a gas or vapour'. Harm is defined as 'harm to the health of living organisms, interference with the ecological systems of which any living organisms form part, offence to the sense of human beings, or damage to property'. Finally, 'pollution in controlled waters' means 'the entry into controlled waters of any poisonous, noxious or polluting matter or any solid waste matter'.
Relevant expenditure
Before any relief is given, the claimant must also satisfy the Revenue authorities that the expenditure must have been incurred on employee and material costs, or on a qualified subcontractor.
Paragraph 5 of Schedule 22 explains what employee costs are deemed to be:
- they are emoluments paid by the company to directors and employees of the company, except for benefits in kind;
- secondary Class 1 National Insurance contributions are included;
- pension fund contributions paid by the company are also allowable.
Only payments made to employees and directors actively engaged in the relevant land remediation qualify. So if an employee or director spends more than 80 per cent of his time on the remediation work, the whole of his costs are allowable. If he spends between 20 per cent and 80 per cent of his time on such work, then the appropriate proportion qualifies, but if it is less than 20 per cent, then none will be attributable costs.
The legislation notes that support service employees, such as secretaries and administrative staff, will not qualify.
Expenditure on materials will be allowed in full, provided that the materials are used directly on remediation work.
With regard to payments made to subcontractors, where the subcontractor and the company are connected, provided that the whole of the subcontractor's payment has been brought in in his profit and loss account, the whole payment, relating to the subcontractor's expenditure on land remediation work, will qualify. However, in this respect, certain other conditions must also be satisfied:
- the relevant expenditure must be incurred by the subcontractor in order to carry out the remediation work on behalf of the company;
- it must not be capital expenditure;
- the costs must relate to employees and materials;
- there should be no subsidies.
The legislation says further at paragraph 10(4) that 'any apportionment of expenditure of the company or the subcontractor necessary for the purposes of this paragraph shall be made on a just and reasonable basis'.
Where the subcontractor and the company are not connected, the whole payment to the subcontractor qualifies for relief.
Fifty per cent extra!
Parts 2 and 3 of Schedule 22 allow the relief in trading accounts or Schedule A computations for qualifying land remediation expenditure to be uplifted to 150 per cent of the actual costs. This applies to the capital expenditure covered by Part 1 of the Schedule although Part 2 does not contain a limitation to capital items only. However, the Treasury Notes on Clauses state that the land must have been acquired as a fixed asset so the intention must be not to give the uplifted relief for expenditure deductible as a revenue cost.
Tax credit entitlement
If a company suffers trading or Schedule A losses during a period that it incurs land remediation expenditure, then it can claim a land remediation tax credit. If the deduction creates a loss described as a 'qualifying land remediation loss', the tax credit can be claimed in respect of the lesser of:
- 150 per cent of the related land remediation expenditure; and
- the unrelieved trading loss or Schedule A loss.
Losses brought forward under section 392A(2) or 393(1), Taxes Act 1988 or carried back under section 393A(1)(b) are not taken into account.
The company is entitled to a tax credit of 16 per cent of the qualifying land remediation loss for the period, although this figure can be substituted by the Treasury as 'they think fit'.
Particularly beneficial to companies' cashflow is that, when a company is entitled to and makes a land remediation tax credit claim, the Revenue has to pay it up front. Alternatively the Revenue may offset it against the company's outstanding corporation tax liability, if any. However, if the company's tax return is under enquiry, the Revenue is not obliged to make the payment until the enquiry is settled. If the Revenue sees fit, it may make a provisional payment.
If the company's pay-as-you-earn liabilities are not up to date, then again, the Revenue may withhold payment of the tax credit.
The legislation ensures that when a loss has been surrendered in exchange for a credit payment, that loss cannot be carried forward. It also states that payment of a land remediation tax credit is not taxable income.
As an alternative to the tax credit, a company may prefer to surrender the tax loss as group relief in the usual way.
Anti-avoidance
Paragraph 29 of Schedule 22 is an anti-avoidance provision designed to counter artificially-inflated claims for deduction for capital expenditure, land remediation relief, or tax credit. Furthermore, if excessive tax credit has been paid, then under paragraph 5 of Schedule 23, the Revenue can recover the excess with interest.
Penalties exist where companies fraudulently or incorrectly make incorrect claims for the tax credit, or later discover that the amount paid was incorrect and fail to remedy the situation. The penalty is an amount not exceeding the excess of the amount claimed over the amount due.
Easy money?
A tax relief for property expenditure which is only available to corporate entities is a slightly odd creature, but all the same this is a generous and valuable relief. It should be particularly attractive to companies acquiring contaminated land for development into their own offices or factory premises.
