Decontaminating land is hard work but a little-known tax relief can ease the burden on half your costs. Simon Massey continues our tax breaks series by explaining how …

Developers that have acquired contaminated land could be getting tax relief at 50% on the expenses incurred in tackling the effects of that contamination. Many developers fail to claim this relief mistakenly believing that that it only covers expenses when contamination has been eradicated from the site. In fact the legislation is less onerous and covers any expense that reduces the potential harm on the site.

So how do you go about claiming this relief? The relief is available to all companies that acquire land in the UK that is in a contaminated state. A critical point however is that the company or any of its related companies must not in any way be responsible for contaminating the land themselves.

HM Revenue and Customs are quite clear about what it will treat as contaminated land. Land is treated as contaminated if substances in or under the land are causing, or could possibly cause harm. It has defined harm as:

  • harm to the health of living organisms
  • interference with the ecological systems of which any living organisms form part
  • offence to the senses of human beings
  • damage to property.
The expenditure qualifying for relief must be incurred to prevent, minimise or mitigate the effects of any harm or pollution of controlled waters, or to restore the land or polluted waters to its original state. Companies do not have to entirely remove the contamination. This expenditure can also include preparatory activity whose purpose is to assess the condition of the land acquired. So even the initial survey of the land prior to acquisition is likely to be a qualifying cost. Typical examples of claims are:

  • Removal of asbestos
  • Clearing of items such as hypodermic syringes where land has been used by squatters
  • Domestic waste tip, where you are trying to prevent water seepage onto adjoining land
  • Scale pits
An important factor to bear in mind is that only the extra expenditure required to deal with contamination qualifies for relief. To make successful claims some basic steps need to be taken:

  • Set up separate accounting codes for stock to record the amounts spent on items that might qualify for the relief.
  • Ask contractors and surveyors to invoice separately for costs that might qualify for the relief, or to disclose in contracts the costs of the remediation of contaminated land.
  • Keep records of any direct staff involvement with the contaminated land, if it is expected that this will amount to more than 20% of their time.
  • Where possible use unconnected subcontractors to deal with the remediation of contaminated land as their costs can be directly identified and attributed to the work.
  • It may also be worth asking a specialist environmental surveyor to quantify the additional costs.
There are some pitfalls. The legislation states that relief will be denied "if the land is in a contaminated state wholly or partly as a result of any things done or omitted to be done at any time by the company or a person with a relevant connection with the company". This means companies should look to mitigate the effects of contamination immediately upon acquiring the land. If you delay remedying a continuing source of pollution even by a short time the Revenue may deny the relief on the grounds that you have contributed to the further contamination of the land during your ownership.

If companies delay remedying a continuing source of pollution even by a short time the Revenue may deny the relief

Timing of the relief is important. There is a significant difference in the timing of the tax deduction between owner occupiers and developers. This means that if you're spending money on your own building you can claim tax relief in the same year that you spent it, which gives you an immediate cashflow advantage.

For expenditure on development property, the deduction is only available at the point at which the property is sold. So if you're building property and take some time to sell it there will be a time lag in achieving tax relief on the expenditure.

Consequently, records are needed of the potential claims for each property; these records must be maintained until the properties are sold to ensure that the extra 50% deduction is allocated in the period in which the property is sold.

This is a valuable and little used tax relief with wide benefits for the claimant. Land can become contaminated by simply parking cars on it (they drop oil). Each company and each development needs to be looked at on its own merits, so I would recommend a careful look at these provisions and seek specialist advice regarding your own circumstances.