Brownfield tax relief: The £1bn U-turn

There was a surprising and yet encouraging U-turn by the government this week when it was announced that the much coveted Land Remediation Relief will not be abolished as previously intended. So what does the change mean for businesses who engage in the development or remediation of brownfield and derelict sites?

The relief acts as a valuable reward for those engaged in the riskier aspects of site development

Firstly, it’s worth saying that this is not an insignificant change. At a conservative estimate over £1bn of costs have already been claimed by the housebuilders alone since 2001, leading to c.£140m in saved tax payments. So there has been obvious relief on hearing the news in this much beleaguered sector. The Land Remediation Relief (LRR) legislation provides an enhanced tax relief of an additional 50% for any expenditure incurred on qualifying remediation works (developers already receive 100% tax relief on any development expenditure). This currently equates to a cash benefit of 13 pence in the pound for a typical housebuilder paying corporation tax, set now at 26%. The only drawback is that the process requires analysis of the contractor’s final account and on costs to identify the qualifying amount as well as an understanding of the 20 or so pages of tax legislation. So it is not the simplest of reliefs to access and may then be the subject of an enquiry from the tax man seeking to understand the basis of the claim.

Back in March, the government had listed LRR as one of 36 tax reliefs it was determined to abolish. Its intention was to simplify the British tax system through the removal of tax reliefs that generally failed to deliver their policy objectives. In the event four survived and LRR was one of them. This goes to show that participation in consultation processes can effect change - putting cynicism around the whole process of consultation firmly back in its box for the moment. Admittedly those engaged in the consultation relating to Feed in Tariffs (incentives for renewable energy, where the policy is changing before the consultation is even closed) might feel otherwise! 

There were three key points that came out of the LRR consultation. Firstly, it was agreed and acknowledged that the relief does influence the investment decision in some cases and can make the difference between proceeding or not with a particular development or site purchase. Secondly, the relief can provide a significant boost to cash flow through a reduction in the amount of tax paid and therefore acts as a valuable reward for those engaged in the riskier aspects of site development. Lastly, the remediation sector had already been hit hard by the removal of landfill tax exemption back in 2009 which would come into effect at the same time as the proposed abolition of the relief (April 2012). Coupled with concerns that the proposed National Planning Policy Framework was moving away from a “brownfield first” policy, the abolition of the relief seems to have been considered one step too far for a Coalition professing to be the greenest ever. Especially at a time when they are anticipating releasing large areas of publicly owned land for development.

So the message for companies involved in the development of contaminated and derelict sites is clear.  The Government is still keen to promote Brownfield before Greenfield, and are prepared to subsidise developers and investors through a reduction in their tax bill.  It is not the easiest of tax reliefs to access but the effort to identify qualifying expenditure (even on historic costs incurred up to four or five years ago) will not go unrewarded. 

Ben de Waal is head of residential at Davis Langdon, an AECOM company