Under the biodiversity net gain regime introduced in the Environment Act 2021, developments must deliver a mandatory improvement to natural habitats to offset the impact of that development. This can be undertaken by improvements to the development site, off-site improvements or through the purchase of biodiversity credits. These improvements can relate to carbon sequestration, water quality improvement and flood mitigation for example.
Biodiversity credits are generally created by a third-party landowner that delivers the biodiversity improvements, and the landowner is often bound to these improvements in section 106 obligations. Once the landowner is bound to make the biodiversity improvements, the improvements are categorised into credits which can be purchased by a developer.
VAT
There is limited HMRC guidance on the VAT treatment of biodiversity credits. However, similarities can be drawn between the purchase of carbon credits and the purchase of biodiversity credits. HMRC guidance on carbon credits broadly sets out that in most circumstances the purchase of carbon credits would be a supply of services within the scope of VAT. This is on the reasoning that carbon credits are measured in units or credits which are a quantified amount of an ecosystem service that can be traded in the market. HMRC’s carbon credit guidance does refer to the existence of other ecosystem credits and confirms that if those credits share the same characteristics as carbon credits, they may have the same VAT treatment if certain principles are met. HMRC’s guidance is consistent with the first principles of VAT under which, without more, anything which is done for a consideration is to be treated as a supply of services where it is not to be treated as a supply of goods.
The principles HMRC refers to which should be used when considering the VAT treatment of biodiversity credits can be summarised as:
- whether the credit can be traded;
- whether the credit represents a quantifiable reduction, removal or gain – for example, if each water credit relates to the reduction in water usage by one metric tonne;
- whether the creation of the credit results in an additional benefit beyond that which would have happened without the project;
- whether there are safeguards to ensure the credit represents the equivalent of the anticipated biodiversity benefit; and
- whether there is any registration or verification of the unit by an independent third party or government body.
As the supply of biodiversity credits meeting the above principles is likely to be treated as a supply of services, it would not be relevant to the VAT treatment of the supply whether or not the landowner or agent has opted to tax the property over which the biodiversity credits are created.
Care should be taken when considering the VAT invoicing of the supply of biodiversity credits where a third-party facilitator or agent is involved. Depending on the arrangements between the parties and the respective payments, there could be VAT supplies directly between the landowner and developer or supplies to and from the agent.
There is also an important distinction where a developer purchases a property with the benefit of biodiversity credits in situ. In that case, depending on the structure of the transaction, any payment to reimburse the seller for the cost of the biodiversity credits may constitute consideration for the supply of the property rather than the supply of the credits directly. This will have VAT implications depending on whether the property is residential or non-residential and the seller’s option to tax position.
Stamp duty land tax (SDLT)
SDLT is triggered on the acquisition of a “chargeable interest”. A chargeable interest is set out in section 48 Finance Act 2003 and consists of:
- an estate, interest, right or power in or over land in England or Northern Ireland; or
- the benefit of an obligation, restriction or condition affecting the value of any such estate, interest, right or power.
Biodiversity credits are generally created through an agreement between the landowner who is creating the credits and a developer or agent (Contracting Party). If the Contracting Party is an agent or facilitator, there is then usually a further agreement with a developer for the purchase of credits either directly from the Contracting Party or from the landowner (Sub Agreement). The party that can enforce the biodiversity restrictions on the landowner if they are not complied with will depend on the agreement between the parties. It may be that the Contracting Party, or the developer has the right of enforcement, or it may be that a local authority or other third-party body has enforcement rights.
If the agreement with the landowner includes enforcement rights or other rights for the Contracting Party to require the landowner to do (or not do) certain things on the land to produce the credits, the Contracting Party may be treated as acquiring a chargeable interest for SDLT purposes. Any consideration provided by the Contracting Party for that interest would be subject to SDLT.
On the other hand, if the Contracting Party or any party to a Sub Agreement acquires credits that are the product or service produced by the implementation of conditions over the landowner’s land enforceable by an unconnected third party, such an arrangement is unlikely to constitute the acquisition of a chargeable interest.
The SDLT position is also different if a developer purchases a property with the benefit of biodiversity credits in situ. In that case, depending on the structure of the transaction, any payment to reimburse the seller for the cost of the biodiversity credits may constitute chargeable consideration for the purchase of the property which would be subject to SDLT in the same way as standard purchase price.
The terms of the agreements should be carefully drafted and structured to balance the interests of the parties and tax advice sought to ensure SDLT efficiency to the arrangements and prevent any unexpected SDLT charges.