Direct Tax Guide to Site Remediation
Updated: Feb 10, 2022
Contaminated Land Remediation Relief (LRR) is the UK's primary direct tax incentive for companies involved in brownfield development, land remediation or bringing long term derelict land back into productive use.
Compiling a LRR claim to withstand HMRC scrutiny takes planning and care but the rewards can be significant. For every £100 of qualifying expenditure the company could receive up to £28.50 (£37.50 from April 2023) in return - don't lose out!
Set out below is a detailed guide with examples of how the rules operate in practise. If you would like more expert input please contact firstname.lastname@example.org.
What is "relevant land remediation"?
What is 'qualifying land remediation expenditure'?
Are there any expenditure exclusions?
What is LRR?
Land remediation relief (LRR) is a corporation tax relief that provides a degree of compensation for the extra cost and risk associated with clearing up contamination on sites in the United Kingdom. It is available to corporate property owners (including Real Estate Investment Trusts), housebuilders and other commercial developers with the following potential cash returns depending on the type of business involved:
Property owners and occupiers – up to 28.5% (150% x 19%*)
Developers, housebuilders etc. – up to 9.5% (50% x 19%*)
Loss making companies (cash tax credit) – up to 24% (150% x 16%)
Developers and housebuilders will normally deduct 100% of the cost as a trading expense so (2) reflects the extra 50% arising from the enhanced 150% deduction. Property owners and occupiers that dispose of a property that has been subject to a LRR claim should exclude the qualifying expenditure from their capital gains tax computations.
The relief is not available to individuals or partnerships. However, a company that is a member of a partnership can make an election in respect of its share of the partnership’s land remediation expenditure provided it satisfies the relevant conditions. There are also special rules for Life Assurance companies.
*Based on the current corporation tax rate of 19% (25% from April 2023)
What does 'land' mean?
Land includes the land itself and any buildings or structures located on it. For example, if a harmful substance, such as asbestos lining, needs to be removed from a building or structure, the cost of removal can attract LRR. It may be held as a capital asset or as part of trading stock. The company must have a 'major interest' in the land which is characterised as the freehold or a lease of at least seven years.
The definition of land for LRR was tested in the case of Dean & Reddyhoff Limited  UKFTT 367 (TC) which dealt with capital expenditure on various items of sea defences and specifically a breakwater constructed on the seabed which was held not to be expenditure on land (it is worth noting that the works to which the case concerned pre-date the more restrictive provisions introduced from 1 April 2009 and the qualifying items which were accepted would not longer qualify for LRR).
What is 'contaminated' land?
For the purposes of LRR, land is contaminated if, as a result of industrial activity, there is:
contamination present in, on or under the land causing 'relevant harm', or
there is a serious possibility that the contamination will cause 'relevant harm'.
“Industrial activity” includes, but is not limited to, any activity within the UK standard industrial classification code (SIC) 92 categories C, D, E & F. These are:
Mining and quarrying - including extraction of fuels, minerals and oils; or
Manufacturing - including fuel processing and production, manufacture of chemicals and man-made fibres, the metal goods, engineering and vehicles industries and other manufacturing industries; or
Supply of electricity, gas and water - the production and distribution of electricity, gas and water; or
The requirement that contamination is from industrial activity does not mean that the site must only have been in use for an activity within these categories. Contamination may be present as a result of the use of the products of an industrial activity even where the land has been used for other purposes. For example, asbestos is present in a building, as a result of industrial activity (the construction industry) even where the building is used as a shop or office. Nuclear sites are specifically excluded from the relief.
Example 1 - Construction is an 'industrial activity'
XYZ Ltd acquires, from an unconnected third party, offices which contain asbestos panelling. They are advised that the panels have not been maintained in accordance with the guidelines and that the panels are now in a state that requires removal.
Although the building has not been used for an industrial activity, the asbestos is present as a result of industrial activity (the construction industry). The new owner is not the polluter and acquired the property in a contaminated state. XYZ Ltd can claim Land Remediation Relief on the additional costs incurred in removing the asbestos panelling.
Example 2 - Other 'industrial activities'
BDE Ltd acquires, from an unconnected third party, a farm complex that had recently fallen out of use. Before they can re-develop the site they have to remove contamination due to spillages of a now banned chemical herbicide.
The new owners can claim Land Remediation Relief because the chemical contamination caused to the land is a consequence of the agricultural industry.
Land is not normally contaminated by virtue of the presence of living organisms or their decaying matter which means things like expenditure on burial re-location, bat conservation, vermin control or clearing up pigeon waste will not qualify for LRR. The only exception to this exclusion is for removing Japanese Knotweed (subject to treatment conditions), radon and arsenic.
Example 3 - Exceptions are narrowly defined
ABC Ltd is re-developing a site that is infested by Himalayan balsam.
ABC Ltd cannot claim Land Remediation Relief for the expenditure on clearing Himalayan balsam as this a living organism and so is excluded from the relief by CTA 2009/S1145. Unlike Japanese knotweed it has not been bought within the scope of Land Remediation Relief by secondary legislation.
Other plants, such as Australian Swamp Stonecrop, Floating Pennywort, Giant Hogweed, Parrot’s Feather and Ragwort do not qualify for Land Remediation Relief for the same reason.
Land is also not contaminated by the presence of air or water in, or under it, which means expenditure on flood defences, reclamation, ordinary ground drainage works and gas resistant membranes for naturally occurring ground/soil gases (other than Radon) that are not present from an industrial activity will normally be excluded.
What is 'relevant harm'?
For the purposes of LRR, “Relevant harm” is defined as meaning:
death of living organisms or significant injury or damage to living organisms,
significant pollution of controlled waters,
a significant adverse impact on the ecosystem, or
structural or other significant damage to buildings or other structures or interference with buildings or other structures that significantly compromises their use.
HMRC will expect companies to have obtained quantitative evidence to back-up claims that the relevant harm is significant through expert study and assessment. This may include documents to obtain planning permission such as ground investigation studies, specialist survey reports, options appraisals and remediation strategies.
Example 4 - Risk must be demonstrably significant
A developer carries out a risk assessment and decides that there is a risk of harm to human health if they do not carry out appropriate remediation, but that if any harm were to occur it would probably be very mild.
The developer cannot claim Land Remediation Relief as the health implications are low.
Example 5 - Barrier to planning is an indication
A housebuilder establishes that there is contamination present on the site. They carry out a risk assessment which shows that harm is likely to be caused unless they take remedial action. They also establish that the impact on human health would be severe enough that they would be unable to obtain planning permission for the proposed land use.
The house builder can claim Land Remediation Relief as there is a high probability that the contamination would cause harm and that the harm would be severe enough to prevent re-use of the site.
Work on contaminated sites that have already been designated as 'Special' and are regulated by the Environment Agency (England), Natural Resources Wales, Scottish Environment Protection Agency (SEPA) will likely have 'significant' risk items for the purposes of (1) to (4) identified as part their designated Special Site status.
Similarly work on sites that are registered on local planning authorities 'brownfield land registers' should also contain an audit trail of contamination that has been identified as significant for the purposes of re-development.
HMRC accept that land is in a contaminated state for the purposes of Land Remediation Relief where the level of contamination from industrial activity exceeds the soil guideline value for that land use (or the proposed land use); provided that the soil guideline value has been used in accordance with the guidance issued by the Environment Agency.
What is "relevant land remediation"?
Relevant contaminated land remediation involves:
"preventing or minimising, or remedying or mitigating the effects of, any relevant harm, by reason of which the land is in a contaminated state."
With the exception of Radon, it is for the company to decide the most appropriate method of remediation, based upon guidance from the planning authorities or appropriate regulatory body.
In practise this means a very wide range of measures may be used to address the problem of remediating land in a contaminated state; for example:
In-ground barriers and cut-off walls
Dig and dump
Cement based stabilisation
Higher grades of cement to cope with industrial iron sulphates
Example 6 - Biological treatment of fuel spillage
DEP Ltd acquire a redundant petrol station from an unconnected party. There has been contamination by leaking fuel. DEP Ltd use an off-site biological treatment to remove the contamination before replacing the soil.
DEP Ltd can claim Land Remediation Relief as the treatment has remedied the problem by removing the contamination. Qualifying expenditure includes the cost of returning the soil to the site.
Example 7 - Barrier containment in housing scheme
WES Ltd are developing a housing estate. There is contamination on part of the site. To prevent contamination of a nearby water course, WES Ltd installs a barrier. This prevents the contamination leaching from the soil into the stream.
WES Ltd can claim Land Remediation Relief as it is preventing the “serious possibility of relevant harm” by containing the contamination and preventing significant pollution of controlled waters.
Example 8 - Asbestos dig and dump
AFG Ltd acquire a site for re-development. Waste by-products containing asbestos were buried on the site and AFG Ltd conclude that the only option is to dig up the waste and dispose of it in landfill.
AFG Ltd can claim Land Remediation Relief as the dig and dump of material containing asbestos has not been excluded.
As a developer, AFG Ltd will be able to claim a deduction for the payments of Landfill Tax under the normal rules for computing its trading profits. However AFG Ltd cannot claim Land Remediation Relief on the payments of Landfill Tax as these are specifically excluded from the relief.
What is 'qualifying land remediation expenditure'?
Land Remediation Relief is only available for expenditure that is incurred because the land is in a contaminated or derelict state.
The condition that expenditure is incurred only because the land is in a contaminated state is satisfied:
to the extent that expenditure on the land is increased and the only reason for that increase is because the land is in a contaminated or derelict state, or
if the main reason that any works are done, operations are carried out or steps are taken is for the purpose of relevant land remediation
The above is subject to a number of exclusions (Landfill Tax, certain Statutory Work Orders and subsidised expenditure provisions). The term “subsidised expenditure” covers subsidies provided both directly and indirectly. A contractor who is paid for carrying out land remediation cannot claim LRR as the costs are ultimately incurred by the principal/client.
There are special rules for in-house development works (staffing and materials) along with payments to connected sub-contractors to ensure the real cost is properly reflected. Professional fees and dedicated unconnected sub-contractor payments for the qualifying works can sometimes qualify in full.
Example 9 - Soil treatment
A Ltd purchases land that is contaminated with oil that has leaked from storage tanks.
A Ltd engages the services of a sub-contractor, B Ltd.
B Ltd excavates the soil, takes it away and subjects it to a process of bioremediation. At the end of the process B Ltd replaces the soil.
A Ltd removes and fills in the storage tanks.
The payment made by A Ltd to B Ltd qualifies because the whole of the work carried out by B Ltd is for the purpose of relevant land remediation. The work is done only because the soil is contaminated.
A Ltd cannot claim Land Remediation Relief for land in a contaminated state on the cost of removing the storage tanks and infilling. This is not a cost of removing the contamination.
Example 10 - Normal soil works excluded
C Ltd is re-developing a brown-field site as a residential estate. There are contaminants in the soil and C Ltd installs a membrane to prevent the contaminants migrating to the surface. C Ltd also imports top-soil and sub-soil for the gardens.
The cost of the top-soil and sub-soil does not qualify for Land Remediation Relief as C Ltd would have imported the soil, to improve the amenity value and provide a growing medium for garden plants and vegetables, whether or not the site was contaminated. So there is no additional cost caused only by the remediation. The cost of the membrane (or other break-layer) installed beneath the soil qualifies for Land Remediation Relief as it is only installed for the purpose of preventing harm that might otherwise ensue.
Example 11 - Extra cost of capping layer only
D Ltd is re-developing a brown-field site as a residential estate. There are contaminants in the soil and D Ltd imports topsoil to create a 1200mm capping layer over the contamination, double the depth that D Ltd normally uses to create amenity areas.
In this example, rather than using a membrane D Ltd has created a barrier using a greater depth of topsoil. Whilst this will still qualify for Land Remediation Relief, D Ltd cannot claim the whole cost of importing the top-soil. D Ltd would have imported topsoil to create a layer 600mm deep to improve the amenity value and provide a growing medium for garden plants and vegetables, whether or not the site was contaminated. D Ltd can claim the cost of the additional 600mm as that expenditure was only incurred because the land is in a contaminated state.
Example 12 - Preparatory work linked to contamination
E Ltd purchases a site for redevelopment as residential properties. It carries out a desk study to identify potential hazards and follows this up by carrying out further work to establish the levels of contamination. As the level of contamination exceeds the soil guideline value for residential property, E Ltd carries out remedial work.
In addition E Ltd carries out tests for radon, which is found to exceed the Health Protection Agency guidelines for residential properties and steps are taken to mitigate the problem.
E Ltd can claim as qualifying land remediation expenditure the preparatory costs of the further tests to establish the level of contamination and the costs of the tests to establish the level of radon.
E Ltd cannot claim the cost of the desk study as this would have been carried out as part of the planning process whether or not the site was contaminated.
What is "derelict land"?
Land is defined as being derelict for the purposes of Land Remediation Relief if it is:
not in a productive state; and
cannot be put into a productive state without the removal of buildings or other structures
The term “productive state” has a wide meaning. It includes land that is in economic use, for example as retail premises or a car park, and land that has a social use, as housing or a recreational area. In addition the presence of buildings or structures on the site must be preventing the site being brought back into productive use.
Example 13 - Only minor use keeps derelict status
The site of a former warehouse has been in use for a number of years as a car park. A Ltd purchase the site for re-development as offices. To enable this to be done, the foundations and services relating to the former warehouse need to be removed.
Land Remediation Relief is not available as the site was in productive use as a car park.
Had the site only been used for two or three days a year, for example as an overflow car park when there is a special event on, then it would not be seen as in productive use.
To qualify as derelict land for the purposes of the relief, land has to have been derelict since 1 April 1998 and HMRC are entitled to ask for evidence of dereliction (e.g. English National Land Use Database, Scottish Vacant and Derelict Land Survey, Survey Reports, Business Rates Registers and insurance data).
Example 14 - Evidence of dereliction at 1 April 1998
A Ltd purchased previously developed land. It was classified as vacant land (as defined at paragraph 11.1 in the English National Land Use Database definitions) from 1998 to 2003, at which point it was re-classified as derelict land (as defined at paragraph 11.2).
Land Remediation Relief for derelict land is not available as the land was not derelict at 1 April 1998.
The benefit of derelict land status is that expenditure on the following items may attract relief:
Removal of post tensioned concrete heavyweight construction;
Removal of building foundations and machinery bases;
Removal of reinforced concrete pilecaps;
Removal of reinforced concrete basements; or
Below ground removal of redundant services.
What about the polluters?
The principle that the polluter should bear the cost of cleaning up any pollution is fundamental to the policy behind Land Remediation Relief. Under the scheme it is intended that the polluter, and any party connected to the polluter, do not obtain the relief and there are a number of safeguards to ensure this.
Example 15 - construction of asset
A Ltd purchased a piece of land and contracted for a builder, X Ltd to construct a building on part of the site. In accordance with practice at the time, X Ltd used loose fill asbestos insulation.
A Ltd are renovating the premises and as part of the renovations, contracted with Y Ltd, a specialist in dealing with asbestos, to remove the asbestos insulation. During the renovations A Ltd ensure that the work is done in accordance with HSE guidelines.
A Ltd cannot claim Land Remediation Relief for the cost of removing the asbestos insulation material as they were responsible for the construction of the building. The fact that the use of asbestos insulation material was normal practice at the time (and for some years after) does not alter the position.
Example 16 - delays in site clean up
B Ltd purchases a former industrial works. A survey shows that the contamination is confined to one part of the site. Following expert advice that the contamination is not spreading, B Ltd decides not to remediate the site immediately and uses another area of the same site to carry out their manufacturing trade which causes no contamination. Five years later, B Ltd needs to expand and decides to carry out the clean up the unused area that is polluted.
There has been no additional contamination due to the delay in cleaning up the site. B Ltd can claim Land Remediation Relief on the additional cost of cleaning up the site. Had the contamination spread and B Ltd not acted timeously it would lose its entitlement to claim.
Example 17 - 'Slice of the action' contracts
C Ltd was responsible for an area of land being polluted. It sells the land to an unconnected third party, D Ltd, which decontaminates the site. Under the sale agreement, the final sale price payable to C Ltd depends on the sale proceeds received by D Ltd.
Although D Ltd has a major interest in the land it cannot claim Land Remediation Relief as C Ltd was responsible for the pollution and is entitled to a share in the sale proceeds.
Example 18 - Landlords with polluting tenant
A Ltd lets industrial premises to B Ltd, whose processes produce a certain amount of contamination. A Ltd decides to buy out the remaining 9 years of B Ltd’s lease and re-develop the site for residential use.
A Ltd engages a specialist remediation contractor to bring the site up to a standard that can be used for residential purposes.
A Ltd cannot claim Land Remediation Relief as the site was not contaminated when it acquired its interest in the site. A Ltd is also the polluter as it allowed B Ltd to carry out a process that was contaminating the site.
Are there any expenditure exclusions?
Expenditure cannot qualify for capital allowances (Structures and Building Allowances are excepted) or be subsidised (indirectly or directly).
Example 19 - Plant and machinery allowances
H Ltd acquires a commercial factory and operates it for a year or so. They decide to substantially upgrade the pipework insulation and discover asbestos lagging. Because they could claim the demolition/stripping out costs under the plant and machinery allowances rules H Ltd is not entitled to Land Remediation Relief.
Had the plant been redundant following acquisition or the expenditure been capable of being treated as a repair (and not capital), H Ltd may have been entitled to claim.
Example 20 - Partly subsidised expenditure
A Ltd acquires land that is in a contaminated state, as a fixed capital asset of its trade, from C Ltd at an agreed acquisition cost of £1 million. The agreement also contains a condition that C Ltd will meet up to £100,000 of A Ltd’s land remediation costs. A Ltd engages the services of an unconnected subcontractor to remediate the land at a cost of £150,000.
A Ltd’s qualifying land remediation expenditure is £50,000. The additional £100,000 is subsidised by C Ltd. A Ltd can elect for £50,000 to be an allowable deduction in computing its trading profit (or loss). A Ltd can also claim additional Land Remediation Relief of £25,000 in its computation of its trading profit (or loss).
What about tax credits?
If a company has a qualifying land remediation loss for the period, it can surrender the loss in exchange for a repayable tax credit which can be offset against outstanding corporation tax liabilities. In broad terms, the credit is worth 16% of the loss attributable to land remediation relief. It will not be paid while any PAYE or NICs for the period are unpaid. Any payment to the company in respect of land remediation tax credits does not count as income for tax purposes.
Where losses are surrendered for a tax credit, the related qualifying expenditure will not be deductible from capital gains arising on a future disposal of the land. The surrender of land remediation losses is limited to the lower of:
the amount of land remediation tax relief claimed during the accounting period (ie 150% of qualifying expenditure); and
the total loss of the trade for the period after land remediation tax relief, reduced by all claims and reliefs which have been, or could have been made to use the loss.
Example 21 - Qualifying land remediation loss example
A Ltd is carrying on a trade and incurs qualifying land remediation expenditure of £50,000 in an accounting period. The expenditure is an allowable deduction in computing its trading loss for CT purposes. In addition A Ltd claims land remediation relief of £25,000 in respect of the expenditure.
After taking other expenses into account, A Ltd has an overall trading loss for the accounting period of £80,000. The company has other income of £10,000 in the accounting period.
A Ltd makes a claim to surrender the full amount of its qualifying land remediation loss in exchange for a payment of land remediation tax credit, but makes no other loss relief or group relief claims for the period:
The company must claim the tax credit in its corporation tax self-assessment (CTSA) return for the accounting period for which the claim is being made. A claim can be made, amended, or withdrawn at any time before the first anniversary of the CTSA filing date for the accounting period. HM Revenue and Customs (HMRC) has discretion to allow a later date.
How are claims dealt with?
HMRC can enquire into claims for land remediation relief and tax credits under the normal Corporate Tax Self Assessment Rules. If a claim proves excessive, any additional tax due or excess tax credit paid can be recovered and interest charged. Fraudulent or negligent claims may result in a penalty charge of up to 100% of the excess. There are also anti-avoidance rules to counter attempts to manufacture or inflate the amount of relief due. In these cases, the amount of relief or credit will be disregarded.