Updated: Jul 5, 2020
Previously recommended for abolition by the Office Tax Simplification (Review of Tax Reliefs - March 2011) because of its failure to drive behaviour change, land remediation relief (LRR) remains the only real tax incentive for businesses who clean up contaminated or long-term derelict land and buildings. The restrictive rules remain ripe for reform to stimulate much needed investment in UK brownfield or contaminated land.
What is LRR?
LRR is a corporation tax relief that is designed to encourage developers and property owners to bring brownfield sites back into productive use.
Unlike capital allowances, LRR is available to property investors and developers with the following potential cash returns on qualifying expenditure elements:
Capital/fixed asset expenditure – up to 28.5% (150% x 19%)
Trading/revenue expenditure – up to 9.5% (an extra 50% x 19%)
Loss making companies (cash tax credit) – up to 24% (150% x 16%)
Businesses that incur capital expenditure should be prepared to exclude the underlying qualifying expenditure from their capital gains tax computations.
The recent case of Northern Gas Networks Limited  UKFTT 121 (TC) is a reminder of the availability of enhanced tax relief for qualifying land remediation expenditure and the rigid criteria associated with such claims.
The case concerns a claim for LRR on £109m of expenditure incurred by Northern Gas Networks (NGNs) on its gas distribution networks which would have resulted in an enhanced tax deduction of up to 50% (ie, a claim of £54.73m).
The expenditure was spread over three accounting periods (31 December 2007 to 31 December 2009) and pre-dated the rule changes for expenditure incurred after 31 March 2009 (Part 14 – Corporation Tax Act 2009) so a lot of this commentary relates to these historical rules.
NGN’s claim failed on some key points and the First-tier Tribunals (FTT’s) interpretation on what constitutes expenditure on the land itself as well as reinforcement of the connected party restrictions have ongoing relevance.
The decision will no doubt attract the interest of other gas distribution businesses and given the amounts involved it is not clear whether NGN will appeal.
NGN acquired 37,000km of gas pipelines from its parent company National Grid Transco (NGT) in 2005 and was required to replace any iron pipes with a high-density polyethylene (HDPE) alternative in order to trade as a gas distribution business. All parties accepted that this replacement expenditure should be deductible for tax purposes (ie, treated as revenue expenditures as opposed to a capital addition).
Iron as a material had been recognised by the Health & Safety Executive (HSE) as giving rise to serious safety issues. The issues arose from the potential for the pipes to fracture as a result of corrosion by effluxion of time and inherent ground conditions. This meant that the pipes gave rise to the risks of escaping gas and gas explosions. The gravity of these risks resulted in the HSE introducing a compulsory programme in 2001 for the replacement or improvement of iron pipes by gas distribution operators such as NGN, which is known as the “30/30 Programme”.
There were no restrictions on LRR claims for work carried out under a statutory obligation for expenditure before 1 April 2009, but such activities are now restricted if carried out under a statutory obligation imposed by legislation listed in a Treasury Order.
This measure (s1146(3A)(b), CTA 2009 and reg 5, Corporation Tax (Land Remediation Relief) Order 2009, SI 2009/2037) is designed to exclude claims for specific notices issued by local authorities and environmental agencies (eg, defective or dangerous premises) and while the requirement to replace iron pipes in the above scenario is not listed, it is an important point to remember for any new works covered by a statutory requirement.
What was in dispute?
In order to claim LRR, NGN needed to demonstrate at the time (old rules) that:
land in the UK was acquired by NGN;
that land was acquired for the purposes of the NGN’s trade;
at the time of acquisition all or part of the land was in a contaminated state;
NGN incurred qualifying land remediation expenditure in respect of the land;
the qualifying land remediation expenditure was allowable as a deduction in computing for tax purposes the profits of a trade carried on by NGN; and
the land must not have been in a contaminated state wholly or partly as a result of anything done or omitted to be done at any time by the NGN or a person with a relevant connection to NGN.
Neither (2) nor (5) were disputed by HMRC, the balance was.
A major change in the new LRR rules is that claimants must have a ‘major interest’ in the land. The old rules followed a much wider definition of “any estate, interest or rights in or over land that is situated in Great Britain and Northern Ireland”.
Over 95% of the expenditure was on public land and HMRC argued that NGN’s rights over the land did not amount to the purchase of land for the purposes of (1) above. The FTT concluded that, apart from the pipes beneath private streets, the rights conferred to NGN did amount to it acquiring the public and other land for the purposes of the old LRR rules.
Land in contaminated state
Another major change in the new LRR rules is the definition of what is “land in a contaminated state” which is now much more closely linked to a previous industrial activity and defined exceptions.
Previously, land in a contaminated state was defined by the substances present and their potential to cause harm.
If you would like more details on how LRR could benefit your project please contact us.