Contaminated land remediation expenditure relief

United Kingdom

The environment industries have been lobbying for years for a tax relief for the clean-up costs of contaminated land. Such relief was confirmed in the March 2001 Budget. The legislative details are set out in Clause 70 and Schedules 22 and 23 of the Finance Bill.

In short a company may treat a qualifying land remediation expenditure as if it were an amount equal to 150 per cent of the actual amount of expenditure and claim relief for that enhanced amount in the relevant accounting period. The qualifying land remediation expenditure must relate to any estate, interest or right in or over land in the UK acquired by the company for the purposes of a Schedule A business or trade carried on by the company. Further the land must have been (either in whole or in part) in a "contaminated state" at the time of acquisition.

Not surprisingly the legislation contains many caveats, exclusions, anti-avoidance provisions and definitions. Whilst these cannot all be referred to in this LawNow article, some of the more notable provisions are: ·

  • The expenditure must have been incurred because the land was in a "contaminated state". Having said this the draft legislation recognises that works on land are often undertaken for a variety of reasons (eg., normal site preparation and remediation). Provided the company can show that particular works were "mainly for the purpose" of remediation then these works will qualify for relief. Importantly if the land is in a contaminated state wholly or partly as a result of anything done or omitted to be done at any time by the company then the expenditure by the company will not qualify for relief. Whilst this later provision is clearly designed to exclude the company’s own contamination, it is not difficult to imagine that the language of the provision may give rise to difficulties in practice. ·

  • Land in a "contaminated state" is defined in very similar terms to that appearing in the statutory nuisance provisions at Section 79(1)(B) of the Environmental Protection Act 1990 ("EPA"). In this context however it is expressly provided that sites falling under the Nuclear Installations Act 1965 cannot amount to land in a "contaminated state" and are therefore effectively excluded. ·

  • The expenditure must relate to a relevant land remediation (the definition of which is very close to the remediation definitions contained in the Contaminated Land Regime at Sections 78A(7) and (8) EPA). ·

  • The only expenditures that will qualify are (a) employee costs (including emoluments and NI and pension contributions) of directors and employees "directly and actively" engaged in the remediation (it appears that the costs of secretarial and administrative employees will not qualify and the provisions for calculating time spent directly and actively on remediation may be difficult to apply in practice); (b) the costs of materials used directly in the remediation and (c) sub-contractor payments (about which there are detailed provisions). ·

  • Importantly the expenditure must not be subsidised by any grant or subsidy or otherwise be met directly or indirectly by any person other than the company. Clearly this provision is likely to interface with contractual indemnities and the like and with some of the provisions of the guidance that accompanies the Contaminated Land Regime (especially the provisions relating to "agreements on liabilities" and the Test 2 Exclusion "Payments made for Remediation"). No doubt this will add more spice to the negotiations between vendors and purchasers on the transfer of contaminated land.

Where the company is in a loss making situation there are detailed provisions concerning entitlement to land remediation tax credits. There are also detailed special provisions relating to life assurance businesses.

These new tax provisions will apply to expenditure made after the date of the Royal Assent of the Finance Bill.

For further information, please contact Paul Sheridan at paul.sheridan@cms-cmck.com or on +44 (0)20 7367 2186.

This article will be published in the Law Society Gazette in the near future.