Environmental developments affecting the construction industry

The development of the UK and EU environment laws and policies continues at pace. A number of these developments have, or will have, direct and indirect impacts on the construction industry. There will certainly be issues relating to costs, design and practices. This article will briefly raise a number of these issues including contaminated land and waste issues. Energy performance of buildings and the new laws on asbestos will be dealt with in another article in the next bulletin.

Contaminated land

This article does not address the well known Statutory Contaminated Land Regime at Part IIA of the Environmental Protection Act 1990. As expected there are, however, a number of important “derivative” legal instruments that have been, or are being, produced or considered. Some of these are set out below.

Contaminated Land Remediation Expenditure Relief

Section 70 and Schedule 22 of the Finance Act 2001 provides that companies (this tax relief only relates to corporate entities) can claim corporation tax relief at an enhanced rate of 150% for capital and other expenditure (including certain employee costs) on the remediation of contaminated land. The legislative provisions essentially have the effect of turning capital expenditure into revenue expenditure. The tax relief only applies to accounting periods on or after 1st April 2001 and as a result only expenditure on or after that date can be considered.

The relief applies to land in the United Kingdom which has been acquired by a company for the purposes of a Schedule A business or trade carried on by that company. All or part of the land must have been in a “contaminated state” at the time of the acquisition, otherwise the relief will not apply. Unfortunately it is not possible to provide a detailed analysis of the tax relief in this article, but as with any tax relief, it is not surprising that there are many qualifications and exceptions which need to be carefully considered. Having said this the tax relief is nonetheless very generous and it is therefore surprising that until recently the take-up of this relief has been very slow. That take-up is now accelerating. Indeed some of the applications are very “imaginative” in the scope to which they seek to test the boundaries of the tax relief. So much so that there must be a danger that one or two of these “imaginative” applications will be so fanciful that they will result in adverse tax tribunal decisions which might run the risk of narrowing down the scope of the relief. We shall have to see.

Many contractors are highlighting this tax relief to the less knowledgeable developers for the very simple reason that it will put their costs in a better light. On the other hand the more efficient developer will want to have in place (perhaps backed up by contractual provisions where needs be) with the contractor and related parties (especially consultants) a clear audit trail of the remediation costs (including time sheets for the relevant personnel) so that he can clearly demonstrate entitlement to the relief to the Inland Revenue.

Interestingly there have been debates concerning whether the costs of asbestos removal from the fabric of a building during a development could attract the tax relief. There was doubt whether this would be possible if the asbestos was in a non-harmful state (and hence the land could not be said to be in a “contaminated” state) and was being removed simply as part of the development. However soundings taken from the relevant policy section of the Inland Revenue indicate that if the development itself disturbs the asbestos such that there is a resulting possibility of harm, then that would cause the land to be in a “contaminated state” and hence attract the tax relief (subject to the other terms of the relief).

The Inland Revenue Code of Practice No. 10 provides that guidance can be sought on a case-by-case basis from the Inland Revenue in relation to the interpretation of the provisions of the tax relief. As a matter of prudent practice it would be best to submit a request for guidance along with the relevant facts to the local tax office before significant remediation expenditure is incurred.

In situ and ex situ site remediation

It is argued that one effect of the above tax relief would be to stimulate the use of in situ and ex situ site remediation techniques and practices. These are often promoted as much “greener” than the UK’s current heavy reliance on remediation by dig and dump at landfill.

There can however be considerable regulatory hurdles to in situ or ex situ remediation. Most particularly, there is deep concern that such remediation might attract the waste laws (on the basis that the contaminants and/or the contaminated soils are waste) and in particular a need for a waste management licence. To avoid this there is often inappropriate use of waste management licensing exemptions and exceptions and mobile plant licenses.

In October 2002 a working party made up of regulatory authorities, landowners, developers, industry, technology providers, insurers and professional advisors recommended that a “Remediation Permit” regulated by the Environment Agency, be created to address these regulatory issues. The report is currently with DEFRA for consideration. It would seem sensible for the construction industry to support this initiative if only because the Remediation Permit is likely to provide greater regulatory certainty and greener credentials. If the contaminated land exemption from landfill tax were to be lost (see below) it might transpire that the Remediation Permit would prove economically advantageous.

Building regulations 2002

In December 2002 the Building Regulations Division of the Office of the Deputy Prime Minister issued a consultation paper for amendment to Part C in Schedule 1 of the Building Regulations. A number of issues, many of which are environment related, led to this current review of the Building Regulations. These issues include land affected by contaminants, climate change and flooding (climate change will be referred to in Part 2 of this article).

With regard to contaminated land the consultation paper recognises that the raft of policy and technical guidance that supports the Statutory Contaminated Land Regime needs to be reflected in the Building Regulations. Primarily this will mean the formal adoption in Part C of risk-based techniques, which to a large extent will be very familiar to the construction industry. There are however two proposed changes that may prove more significant.

The first change relates to the geographical area covered by Part C. The current Part C only relates to the ground covered by the building. Due to concern relating to migrating contaminants it is proposed that Part C should be extended to all parts of the site of the building (namely the building and all land around it which forms the same property holding). It is easy to see that in certain circumstances this could prove onerous.

The second amendment relates to material changes of use. The proposal is that the new Part C requirement relating to contamination be added to Regulation 6 of the Building Regulations. This will mean that it will have to be complied with (otherwise criminal sanctions will apply) when there are certain material changes to the existing building use, namely changes to residential use or other use with sleeping accommodation. Barn and warehouse conversions are given as examples but obviously in the light of the current emphasis on mixed-use developments the application in practice of this proposed amendment may be much wider.

Waste law

Pre-budget statement – November 2002

The Chancellor confirmed that landfill tax, which is currently set at £13 per tonne, would continue to rise by £1 per tonne each year until 2004-2005 when it will have reached £15 per tonne. However, the Government is also to consult on proposals to increase the landfill tax accelerator from 2005-2006 to £3 per tonne until the tax reaches £35 per tonne. Clearly an accelerator of this nature may give rise to significant cost impacts for waste (other than inert waste) generated in a development. The landfill tax for inert waste is to remain at £2 per tonne.

The current exemption from landfill tax for contaminated land and buildings’ waste is to remain save there are increasing demands from environmentalists and environment technology suppliers for this exemption to be removed in order to encourage further in situ and ex situ land remediation.

The exemption from landfill tax for contaminated land and buildings’ waste is sometimes complicated but obviously should a developer (which is not the polluter) fail to secure this exemption it may perhaps be able to nonetheless perhaps recover a proportion of the costs pursuant to the Contaminated Land Remediation Expenditure Relief (see above).

The Chancellor also confirmed that the Government is to push ahead with its intention (announced in the 2002 Budget) to implement a lorry road user charge based on distance travelled. Clearly this may have a cost impact for the construction industry, particularly if bulk materials are to be removed to distant landfills and/or other sites.

Waste Electrical and Electronic Equipment

After many years final agreement was recently reached at EU level on the Waste Electrical and Electronic Equipment Directive (commonly known as the “WEEE” directive). The directive is likely to come into force in the Spring of 2003. Thirty months thereafter “producers” of electrical and electronic equipment will have to finance certain aspects of the collection of WEEE and finance the treatment, recovery and disposal of that WEEE. The financing obligation will relate not only to electrical and electronic goods put on the market after the coming into force of the directive but also existing goods (known as “historic WEEE”). Whilst much of the practical detail of the directive needs to be trashed out at domestic level and put into domestic legislation for the construction industry there is a simple message. This is that the industry will have to take into account in its financial planning that the electronic and electrical equipment producers will internalise the costs of the ultimate waste management in the sale price of their goods; i.e. the prices of electrical and electronic goods may very well increase. The WEEE directive applies to a vast range of products which are often used in the fitting out and renovation of a building such as large and small household appliances (e.g. fridges and ovens) lighting and heating and cooling equipment.

It is clear that environment issues are slowly but surely being pushed, directly and indirectly, into many aspects of the construction industry. Nearly all of these issues will consume management time and will have cost implications. The cost implications will need forward planning if the cost risk is to be neutralised through a fiscal relief or otherwise minimised.

In part 2 of this article environment issues relating to the energy performance of buildings and the new Regulations relating to asbestos will be discussed.

This article was first published in ‘Construction Law’.

For further information please contact Paul Sheridan at [email protected] or on +44 (0)20 7367 2186.