Taxation guidance on ecosystem services

Two years on from the original HMRC consultation, guidance on how the UK tax system applies to “ecosystem services”, which cover arrangements for landowners to receive payments to deliver environmental benefits such as biodiversity enhancement, nutrient reduction, and carbon sequestration, has now been provided.

The guidance focuses on statutory schemes in England, notably Biodiversity Net Gain (BNG) and Nutrient Neutrality as well as voluntary schemes such as the Woodland Carbon Code and Peatland Code. BNG requires developers to deliver a minimum 10% increase in biodiversity through on-site works, off-site units, or government credits. Nutrient neutrality ensures developments do not add pollution to protected habitats, often achieved via nutrient credits generated by landowners. Carbon schemes allow landowners to create tradable carbon credits, representing emissions reductions or sequestration, which can be sold or retired by purchasers.

A key concept is “stacking” where multiple environmental services (e.g. biodiversity, carbon, and nutrient mitigation) can be generated from the same land if outcomes are distinct and double counting is avoided.

The note sets out detailed tax implications for both purchasers and landowners. For developers and businesses, payments made to meet legal requirements (e.g. BNG or nutrient neutrality) are generally deductible as trading expenses, although some costs may be treated as capital expenditure linked to land value. Purchases of carbon credits are typically deductible when used in a trade (e.g. offsetting emissions), while trading in credits follows normal income rules, investment holdings may instead fall within capital gains tax.

For landowners, receipts from ecosystem services are usually treated as taxable income, either as part of an existing farming or property business or as a new trade based on commercial land use. Special rules apply to woodland income (which may fall outside trading income), while peatland income is generally taxable. In some circumstances, such as long-term restriction or “sterilisation” of land, payments may be treated as capital rather than income but each case much be treated on its own merit.  There may be additional factors including Stamp Duty Land Tax, VAT and inheritance tax to consider before entering into any arrangements which are not specifically covered in the guidance.

Overall, the guidance provides a framework ensuring that emerging environmental markets are taxed consistently while reflecting the diversity of land-based activities. 

Need help?

Please contact us if you would like further information or to discuss your individual requirements, either get in touch with your usual Larking Gowen contact, or email enquiry@larking-gowen.co.uk.

A link to the guidance document can be found here: Technical note on ecosystem services - GOV.UK