Carbon offsetting is a positive measure to safeguard the environment but taking up grassland and good stock hill farmland to offset carbon could be detrimental to our ability to be self-sustaining in food production.
This position is supported by Scottish Land & Estates in their Route #2050 Report which calls for Government policies that recognise the potential of an integrated land management approach on sustainable food, sequestering carbon and improving biodiversity, for the benefit of all in Scotland.
Amongst the suggestions are calls to set out a clear minimum standard for carbon audit tools, which will give farmers and land managers confidence in the carbon audit and soil sampling process, and for the biodiversity assessment tool to be brought forward. This will help landowners to understand their own carbon footprint, and in turn, help increase biodiversity, maximising Scotland’s natural capital.
Once the decision is made to create woodland and the landowner has gone through the complex process of registering, assessing and validating the project, Pending Issuance Units (PIUs) are issued and, after verification, commuted to Woodland Carbon Units (WCUs), representing the amount of carbon sequestrated. A PIU is a promise to deliver a Woodland Carbon Unit (WCU) and can provide the owner with a useful source of upfront funding. For the purchaser, a PIU can help to facilitate forward planning as part of the transition to ‘net zero’ emissions.
But with carbon credits now being traded, the question of taxation looms, and without specific guidance from HMRC, we can only apply general tax principles.
Income that arises from a commercial woodland occupied with a view to the realisation of profits, is exempt from a charge to income tax (or corporation tax). When amounts received are linked to a farming trade (or the commercial management of land), they will form part of the taxable trade profits. The sale of standing timber is exempt from a charge to capital gains tax.
It would clearly be beneficial for the woodland owner to have income from the sale of carbon credits falling within the tax exemption available to a commercial woodland. However, in the absence of specific tax treatment guidance from HMRC, there is a risk that a woodland owner could be subject to either income tax (at a rate of up to 46% in Scotland), or corporation tax (currently 19% and potentially rising to 25%) on proceeds received from the sale of WCUs or PIUs.
A single sale of a carbon credit would fall within the charge to capital gains tax.
A woodland owner who is registered for VAT is required to charge VAT on amounts received from the sale of timber from the woodland. Receipts from the sale of WCUs will also be subject to VAT at the standard rate, as a WCU is considered a supply of services. As for other forms of carbon credit transactions, such as the sale of PIUs, we recommend getting specialist VAT advice on the treatment of this income.
Inheritance tax reliefs may be available in the form of Agricultural Property Relief (APR), Business Property Relief (BPR), or Woodlands Relief. A woodland owner will want to make sure that inheritance tax reliefs are available. Professional advice should be sought where additional value is held in the form of carbon credits.
If you need any advice, or have any questions, please contact the Chiene + Tait Rural Team at firstname.lastname@example.org or call 01463 575400.