Cleaning up contaminated land

Roger Jones of Larking Gowen discusses a little used tax relief.

Remarkably little has been written, seemingly in the specialist taxation press or elsewhere, about a new relief which was introduced in Finance Act 2001. This is all the more surprising when it appears to give something for nothing. That is to say an immediate deduction against trading profits for expenditure of a capital nature and, even then, at 150% of the costs incurred. It is probably fair to say that it remains a little known tax relief.

However, it may soon become very relevant to a number of traders. The reason for this lies in Regulation 4 of the Control of Asbestos at Work Regulations 2002 (see page 13, Countryside Building, Summer 2003). This comes into effect on 21 May 2004.

By that date, anyone who is responsible for property which is used as a workplace, must have assessed and be dealing with any risk in relation to asbestos in the building. If an initial assessment reveals asbestos materials that are damaged, or likely to be damaged during normal occupation of the premises, the building may be considered to be contaminated because the asbestos poses a health risk to the worker. It has been estimated that there may as many as 0.5 million buildings in the UK that contain asbestos. Any contamination needs to be dealt with by expert contractors, which may be expensive.

This is where the benefit of the new tax legislation may come in. In summary, the relief works as follows. If a company spends £1,000 on remedial work, it can then obtain a deduction against profits, reducing its tax liability by up to £450 (£1,000 x 150% x 30%). If the company has trading losses, then it could receive a cash payment of up to £240.

The main elements to the legislation are:

  • Who can claim relief.
  • What type of expenditure qualifies for relief.
  • The rate of relief.
  • Cash rebate when the company has no tax to pay.

Who can obtain the relief?

The relief is only available to companies. All other categories of taxpayer: sole traders, partnerships and trustees, are excluded.

In order to obtain the relief, a claim in writing is required, to be contained in the company’s corporation tax return and made within 2 years of the end of the accounting period in which qualifying expenditure was incurred. Claims may be amended or withdrawn within the normal corporation tax provisions. The expenditure is set against profits for the accounting period in which it is incurred.

The company must have acquired the contaminated property for the purposes of its trade, or a rental business. This would appear to exclude a company which acquires such property as its stock in trade, say a property trader or developer. However, given the Government’s intention that as much development as possible should encompass brown field sites, this would seem unnecessarily restrictive. It does appear though that the Inland Revenue accepts that the relief is due in such circumstances.

There are special rules for life assurance businesses which are not addressed in this article.

Qualifying Property

Companies are entitled to the relief if:

  • They have acquired land in the UK for the purposes of a trade or rental business carried on by the company.
  • At the time of acquisition, all or part of the land is contaminated.

What is Contaminated Land?

Throughout, the legislation refers to land, though the ordinary legal construction would take this as encompassing any buildings constructed thereon. Contaminated land is where harm is being caused, or may be caused, or there is pollution of waters, or waters may be contaminated. A nuclear site is excluded.

It is therefore the presence of any substance in, on or under the land that is causing, or may cause, harm to the health of living things, damage to property, offence to human senses or pollution to a watercourse. That substance may be any solid, liquid, gas or vapour.

The Inland Revenue takes the view that substance cannot include any living organism, such as insects, plants or animals. This would seem to preclude from the relief measures taken to remove a plant such as Japanese Knotweed. This is a plant resistant to most herbicides, which regenerates quickly and can be destructive to land and buildings.

Expenditure Qualifying for Relief

The first important point to note is that this relief is for capital expenditure; in other words, it is once and for all outlay which enhances the value of the land and buildings in question. From general tax principles, relief for such expenditure can normally only be obtained in calculating any profit arising on disposal. This particular legislation is unusual in permitting offset of such expenditure against trading profits. Ordinary revenue expenditure on repairs and maintenance may include remedial work to deal with contamination and would generally be deductible against profits, but without the benefit of the 50% uplift.

The purpose of the expenditure has to be to correct or minimise, prevent or mitigate pollution. This may be of the land or buildings themselves, or adjacent land, or controlled waters affected by the land. It must be on relevant remediation work; thus, the usual site preparation, of clearing and leveling etc, prior to building works is excluded.

The expenditure must be on:

  • Materials directly applied in correcting the contamination.
  • Employee costs directly related to the carrying out of the work.
  • Payments for work carried out by sub-contractors.

There are limitations on the employee costs which may qualify. Whilst it can extend beyond direct salary (to include for example employer’s national insurance contributions, pension costs and benefits in kind), no allowance is made unless the employee or director of the company expends more than 20% of their time on the work. On the other hand, where more than 80% of the individual’s time is spent on this work, all the costs are allowable. In between the two extremes, the relevant costs are to be apportioned between remedial and non-remedial work. The costs of secretarial and administrative staff cannot be included in relevant employee costs. In practice, there would seem to be a significant advantage in using an external sub-contractor. The whole costs will be deductible as a direct amount paid (even if it includes the sub-contractor’s own underlying costs which would not qualify if incurred by the company itself).

Qualifying costs may include preparatory work, such as investigation and assessing the land before remedial action is taken. For example, this would seem to allow companies to claim for the cost of assessing buildings for contamination as required by the Control of Asbestos at Work Regulations 2002. However, the Inland Revenue’s expressed view is that no relief is due where the preparatory activity does not lead to remediation work. So, where no asbestos is found, or where asbestos is discovered but is considered to be safe if left undisturbed, the assessment costs will not attract this relief.

The expenditure must not be subsidised so, if a grant is available towards the work, again no relief is due.

Further, no relief may be claimed where capital allowances are available. This could have a very significant adverse effect. For example, a farming company may construct a new slurry pit to prevent animal effluent from contaminating a nearby river. Such expenditure would very probably qualify for agricultural buildings allowances, attracting an annual allowance of 4%, thereby preventing the 150% relief in Year 1. There is no mechanism for disclaiming capital allowances in such circumstances.

What’s the Catch?

If this all sounds too good to be true, then it probably is. The relief only applies to capital expenditure on newly acquired land and buildings.

A company, or any person connected with it, which has wholly or partly caused the contamination (or omitted to do anything which has resulted in contamination) cannot claim the relief.

This potentially gives rise to a number of problems:

  • The words “wholly or partly” imply that if, say, 95% of the contamination occurred before acquisition and 5% after, no relief at all is due. Suppose a company buys a property with a leaking septic tank, which is causing pollution. After acquisition, the leak continues causing further pollution before replacement is effected 6 months later. Seemingly, no relief is due on the basis that the company omitted to take immediate action.
  • The “connected” test might limit the relief. If your company acquires contaminated land then, all other things being equal, you should qualify for tax relief on the costs of cleaning it up. However, if it were to acquire the shares of another company already holding the land, then it seems that it would not.
  • There is no incentive to clean up the company’s own mess. The contamination may come from actions incurred 50 years or more ago, when environmental controls were far less stringent. A change of management these days may wish to do something about it, but cannot qualify for similar incentives to a new purchaser.

Rate of Relief

Once a claim for relief has been made, the legislation permits a deduction against trading or rental business profits of 150% of the actual costs incurred.

This then effectively obtains tax relief at the company’s marginal rate of corporation tax.


A Ltd has profits attracting the mainstream rate of corporation tax at 30%. It incurs qualifying expenditure of £10,000. The tax relief obtained is:

£10,000 x 150% x 30% = £4,500
and its net outlay is £5,500

The marginal tax rates applying to other companies are:

Profits in Range Marginal CT Rate

0-£10,000 0%
£10,001-£50,000 23.75%
£50,001-£300,000 19%
£300,001-£1,500,000 32.75%
£1,500,001+ 30%

A Cash Rebate

It may be that the company’s profits are insufficient to absorb a trading deduction equal to 150% of the qualifying expenditure. Indeed, many agricultural businesses are experiencing troubled times and may be in a loss-making situation.

In such circumstances, the company may surrender the losses to the Inland Revenue in return for a cash payment (the land remediation tax credit). This is equal to 16% of the loss surrendered. It should be noted that (excluding the very smallest of companies which enjoy a corporation tax rate of 0% on the first £10,000 of profit) this is well below the tax rate otherwise likely to apply.

The loss which may be surrendered is the lower of 150% of the qualifying expenditure, or the actual trading (or rental business) loss incurred.


B Ltd has a trading loss and also incurs £10,000 of qualifying land remediation costs. The payable credit is:

£10,000 x 150% x 16% = £2,400
and its net cost becomes £7,600

This is rather more than A Ltd above and it is in a much worse trading position. The loss cannot be restored to generate a greater relief when its fortunes turn round.

Even then, it is not all plain sailing. The cash is not paid over by the Inland Revenue until the company has settled PAYE and NIC liabilities for payment periods ending in the accounting period of the expenditure. The payment may also be used to cover any corporation tax liability of the company.

Planning Points

  1. Use a company. This is the only type of business vehicle which qualifies for the relief. Its availability may be a doubtful advantage in considering the incorporation of an existing business, but a suitable arrangement might be constructed
  2. Buy land direct, not shares in another company. The acquirer must own the land to get the relief
  3. Contain the situation immediately on acquisition. Further deterioration before remedial work is undertaken could prejudice the relief
  4. Ensure that the costs incurred are of a capital nature. Revenue costs will not attract the 50% uplift which might inhibit a property company which holds land as trading stock
  5. Sub-contract the remediation work. Whilst the company might have to suffer the sub-contractor’s profit margin, it does ensure that all costs are allowable. Doing the work in-house could limit the staff costs which qualify for relief.

Roger Jones BSc FTII TEP - Senior Tax Manager with Larking Gowen, Chartered Accountants in Norwich. He may be contacted at 01603 624181 or Visit the firm’s website at
Roger specialises in direct taxes. He began his career in taxation with the Inland Revenue, after which he had spells at Price Waterhouse and Ernst & Young, before joining Larking Gowen in 1994. He is a Fellow of the Chartered Institute of Taxation as well as a Registered Trust and Estate practitioner. His responsibilities for the firm include complex consultancy matters across a wide spectrum of taxes as well as training and technical writing.

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