Accountants and their clients are increasingly being targeted by aggressive tax marketing around land remediation relief (LRR). LRR claims are rarely straightforward. Despite the attractive headlines, there are many ‘bear traps’ to catch the unwary. In this article, I’ll explain some of the areas of difficulty and look ahead to the consultation on LRR announced in the Autumn Budget 2024. 

The LRR rules are contained within s1143-s1179, Corporation Tax Act (CTA) 2009. HMRC’s guidance can be found in its corporate and intangibles research and development manual at CIRD60000 – 68070. Based on HMRC’s latest estimates, in 2022/23 approximately 1,750 companies claimed LRR at an annual cost for HM Treasury of £50m.

Claims for relief

LRR is a corporation tax relief that provides a degree of compensation for the additional costs arising from remediating or mitigating contaminated land and buildings (CIRD63270). It is available to corporate property owners (including real estate investment trusts), housebuilders and other commercial developers with the following potential initial cash returns, depending on the type of business involved:

1. Property owners and occupiers: up to 37.5% of the value of the qualifying costs (150% x 25%*).
2. Developers, housebuilders, etc: up to 12.5% (50% x 25%*).
3. Loss-making companies (cash tax credit): up to 24% (150% x 16%).

* Based on the current main rate of corporation tax

A property owner (1, above) that sells their building will have to exclude 100% of the expenditure qualifying for LRR in any subsequent capital gains calculation. Therefore, it is only the extra 50% (as in 2, above) that can be relied upon as a permanent incentive. Whether the underlying 100% provides a permanent saving or temporary cash flow will depend on the facts of each case.

The 16% credit for loss-making companies (3, above) is based on the ‘unrelieved trading loss’ for that period (CIRD68010). The tax credit will not be paid while any PAYE or national insurance contributions for the period are unpaid.

Businesses and their advisers should beware of fee arrangements that ignore the underlying tax deduction that a company might already receive under general tax principles (eg, 100% deduction for revenue expenditure) or do not reflect the commercial reality of the business (eg, investor with short to medium exit targets). Claims for tax credits are simply not viable without a complete picture of the claimant’s tax position (eg, trading profits v losses) and should never be submitted in isolation or without proper tax cash-flow forecasting at company (not project) level.

Also, it is the accounting treatment that determines when a company can claim LRR for revenue expenditure that can result in businesses waiting a year or more when these costs are held in work in progress (CIRD60055) and only recognised in the period of sale. Large sites may also have localised contamination combined with phased sales that can complicate calculations.

Subsidised expenditure

A condition for LRR is that the expenditure cannot be subsidised (directly or indirectly), which means grants or other third-party payments must be excluded from any LRR claim (on a just and reasonable basis when not specific). 

A housebuilder who acquires a contaminated site from an unconnected third party and bears the risk for clearing up the contamination should expect to retain the benefit of any LRR claim. However, a business that acquires a site at below market value, negotiates a payment against the contamination works or agrees to share the upside of a cleaned site on subsequent sale with a seller (‘slice of the action’ contracts; CIRD60155), should prepare to have its LRR claim restricted and, in some cases, rejected in full.

A building contractor who receives a payment from their client is unlikely to be entitled to claim LRR, not just because the expenditure is being met by a third party (and potential claimant), but because they are unlikely to hold a ‘major interest’ (freehold or lease with unexpired term of at least seven years) in the land.

Be wary of any deal that seeks to share the risks/upsides of any contamination works whether on acquisition or future exit. Direct payments towards contamination works will always restrict a claim. 

Reversionary interests and tenants

A fundamental feature of the LRR rules is the ‘polluter pays’ principle. There is no apportionment of responsibility for the contamination. Where a company (or a person with a relevant connection) is treated as the polluter then that company cannot claim LRR. It does not matter if the pollution was deliberate or accidental. If you omitted to act to prevent or mitigate the pollution you will be complicit with the polluter.

The starting advice to landlords from HMRC is stern: “A Landlord cannot claim Land Remediation Relief for cleaning up contamination caused by one of their tenants” (CIRD60190). 

There are also additional rules to prevent LRR claims where a polluter retains an interest (including an option to acquire) in the new lease, sale and leaseback or lease and leaseback deals (CIRD60150).

LRR claims for sites with polluting tenants or arrangements where a polluter retains a relevant interest will normally be restricted.

Industrial activity

For the purposes of LRR, land is contaminated if, as a result of ‘industrial activity’, there is:

• contamination present in, on or under the land causing ‘relevant harm’; or
• there is a serious possibility that the contamination will cause ‘relevant harm’. 

For this purpose, ‘industrial activity’ includes, but is not limited to, any activity within the UK standard industrial classification code (SIC) 92 categories C, D, E and F (see CIRD61250). Contamination from living organisms or decaying matter deriving from living organisms, air or water are excluded, with limited exception for arsenic, radon and Japanese knotweed (CIRD60025).

This means there will be costs in genuine brownfield regeneration that will not qualify for LRR. For example, costs associated with stabilisation of former mine shafts will be significantly restricted (air exclusion) as well as ‘contamination’ arising from non-industrial activities (eg, domestic litter, vandalism and vermin). Unlike asbestos and high-sulphate cement, reinforced autoclaved aerated concrete (RAAC) is not classified as a ‘contaminant’ with the same potential to cause ‘relevant harm’.

LRR claims require an evidence-based approach that not only links the contamination to an industrial activity (which can include the assets’ original construction), but also the concept of ‘relevant harm’ or ‘serious possibility’. Expenditure with more than one purpose (ie, incurred regardless) is unlikely to qualify.

Derelict land or buildings

When the original 2001 LRR rules were tightened in 2009, a new category for expenditure on long-term derelict land was introduced with the key date of 1 April 1998. This date has not changed since, which means that the site must have been vacant for 26 years or more. Also, the type of qualifying expenditure is narrow (CIRD60020). 

The reality is that, with the passage of time, this provision is virtually obsolete and there are hardly any cases in practice, so both the date and qualifying expenditure conditions are ripe for review.

Areas of potential reform

Suggestions for LRR reform include: 

• reviewing the rate of relief;
• an ‘above the line’ tax credit with faster payments for work in progress;
• reform of derelict land conditions (eg, reducing the requirement to, say, 10 years);
• provision for works to former mining sites; and
• standardised report templates.

If LRR does stay on the statute books, it will need to be more impactful and with that be capable of efficient scrutiny from HMRC. Significant claims (say, in excess of £2m) could be included in the latest corporate tax roadmap proposals to develop a new process that will give taxpayers increased advance certainty.

It may be that the government also finds that LRR has a role to play in its plans to get Britain building, in which case it is all the more important that improvements are made to what can be an important tax relief. 

Bryan Crawford, Director, Furasta Consulting. A guide to LRR is available on Furasta Consulting’s website.