Land remediation relief (LRR) is a very valuable relief that applies to contaminated or derelict land in the UK, which can make financially unviable projects viable.
The availability of LRR does not appear to be widely known and, as a result, many companies are deterred from developing contaminated or derelict land because their profitability targets prevent them from seriously considering such projects.
Bruce Gordon, a principal at international environmental consultancy ENVIRON, says: ‘‘LRR has the potential to make many more impacted sites viable. The opportunity that LRR represents is largely overlooked, but should be an essential milestone consideration, especially in the asset acquisition and disposal strategy for development and industrial companies.”
What is LRR?
LRR allows companies to claim up to a 150% corporation tax deduction for revenue and capital expenditure incurred in remediating certain contaminated and derelict sites.
Who can claim LRR?
Only companies can claim LRR. It cannot be claimed by partnerships or individuals.
LRR can apply to a company in partnership even if its fellow partners are not companies. In these circumstances LRR can be claimed by the relevant company in respect of its share of the partnership’s land remediation expenditure.
The claimant company must own the relevant land, or have had a lease of at least seven years granted to it in respect of the land, or have taken an assignment of a lease of such land with at least seven years remaining.
LRR can be claimed in respect of expenditure incurred before the claimant company commences trading.
Land in a contaminated state
The relevant property must be acquired in a contaminated state save where Japanese knotweed is concerned, as HM Revenue & Customs accepts that this can be spread by fly-tipping. Land or buildings in the UK are in a contaminated state if there is contamination present as a result of industrial activity or certain natural contaminants (namely radon, arsenic or Japanese knotweed), such that it is causing relevant harm or there is a serious possibility that it could cause relevant harm.
“Relevant harm” includes structural or other significant damage to buildings or other structures or interference with buildings or other structures that significantly compromises their use.
However, the clear-up of nuclear sites does not qualify for LRR.
Polluter pays
LRR relief cannot be claimed by the polluter or anyone connected to the polluter. This applies irrespective of whether the pollution occurred because of something the relevant polluter did or failed to do.
LRR is not available if the polluter retains any interest in the contaminated land. That interest could be a reversionary interest (eg where a lease of the land is granted) or a financial interest (eg where the land is sold subject to any right for the polluter to share in any future sale proceeds of the property). A tenant is unable to claim LRR for cleaning up land contaminated or made derelict by its landlord.
Land in a derelict state
Land is considered to be in a derelict state if it is out of productive use and it is incapable of being brought back into productive use unless buildings or structures on it are removed.
“Productive use” includes land used for an economic use or land that has a social use, such as housing or a recreational area.
The land must have been derelict throughout the period beginning with the earlier of 1 April 1998 or the date the land was acquired by the claimant company.
The land must be derelict when acquired. LRR is not available to a company that allows property to become derelict and subsequently brings it back into productive use.
Derelict land: qualifying works
To qualify for LRR, the expenditure must be on either preparatory works or on the removal of post-tensioned concrete heavyweight construction, building foundations and machinery bases, reinforced concrete pilecaps or basements, or below-ground redundant services.
Qualifying expenditure
In respect of both contaminated and derelict land, expenditure incurred to qualify for LRR must be on employee costs or materials or on certain subcontracted land remediation. The expenditure must not be subsidised.
LRR is even available if a company carries out an options appraisal and decides on a remediation strategy that subsequently proves unsuccessful. Expenditure incurred on preparatory activities, eg desk studies, can qualify for LRR provided the company goes on to carry out the remediation, as can expenditure on professional fees for advice on how to remove the contamination or the derelict structures.
Work carried out pursuant to a statutory obligation will not qualify for LRR.
Amount of LRR
Companies can deduct an amount equal to 150% of the clean-up cost when calculating their taxable profits. So, for example, if a company spends £150,000 on clean-up costs it can deduct £225,000 from its taxable profits. This means that not only is the relevant land remediation expenditure deductible but an additional 50% of that expenditure can also be deducted, which can give rise to reasonable tax savings.
If the company is loss-making it may be able to claim a cash payment of an amount equal to 16% of any LRR for the accounting period the claim relates to.
What should be done now?
No companies should be deterred from developing or buying contaminated or derelict land and should, when undertaking any appraisal to determine whether to buy the land, check whether LRR would be available. LRR could alter the financial viability of the project.
Companies wanting to develop contaminated or derelict land and claim LRR will need to ensure they are not connected to the polluter and that the polluter retains no interest in the property, be it reversionary or financial.
Alex Barnes is a tax partner at Irwin Mitchell
