Biodiversity Net Gain: VAT considerations for Land Managers

The biodiversity net gain (BNG) requirements aim to improve habitat for wildlife. With some exceptions, providing a minimum 10% net gain in biodiversity is now a condition for all developments in England. Developers must submit a Biodiversity Gain Plan to the Local Planning Authority and have this approved before starting work on site.

The intention is to increase biodiversity on the development site itself. Where this is not possible, developer will buy off-site biodiversity units on the open market or (as a last resort and typically priced accordingly) buy statutory biodiversity credits from the government. Biodiversity units are based on land that is biodiverse such as woodland, wetlands, grassland or heath and shrubland. The land is managed by a land manager to maintain the biodiversity.

The current rules apply to developments in England. The Government have consulted on extending BNG obligations. It is expected that from May 2026, BNG will become a requirement for “nationally significant infrastructure projects”.  It is also possible that the Government will legislate to remove certain “smaller” development projects from the BNG requirements.  

There is already a growing market for biodiversity units provided by land managers. With the proposed changes to BNG obligations, there is likely to be an increase in demand for offsite BNG units. This provides opportunities for farmers and estate owners to use their land to provide biodiversity units. However, this is a long-term commitment – the biodiversity must be maintained for a period of thirty years. Some of the uncertainty around the lower end of the development market could have a cooling effect on the market, given the long-term nature of the commitment.

The need for developers to acquire BNG units to facilitate developments, makes land managers a key player in the real estate development markets, from residential and commercial through to energy and infrastructure. Also, developers may choose to act as land managers, to generate BNG units for their own group company projects, either on separate sites or where there is a degree of additionality that can be created on existing development sites.

When considering setting up as a supplier of BNG units, a land manager should consider the long-term costs and potential VAT implications. At the current rate of 20%, the land manager will want to ensure that VAT costs are recoverable over the thirty-year life of the BNG units. Unexpected irrecoverable VAT costs may have a significant impact on the overall profitability of the project.

Set up costs and sales of BNG Units

Land managers establishing BNG units for sale are likely to incur costs both in connection with the land and for professional advisors. Land Managers will incur VAT on these set up costs. This VAT should be a cash flow cost only for any VAT registered Land Manager.

VAT at 20% should be charged on sales of BNG units to developers. After a period of uncertainty, HMRC confirmed in 2024 that sale of BNG units are standard rated supplies for VAT. This is the case whether or not the landowner has made an option to tax over the land.

Ongoing maintenance costs

Over the course of thirty years, the land manager is responsible for the upkeep and maintenance of the land and habitat used for BNG units. The nature of the costs incurred will depend on the habitat. Examples of potential expenses include removing undesirable species that threaten the habitat, maintaining fencing, coppicing to manage woodland, planting seeds and shrubs, or desilting/dredging ponds. Also, ecological monitoring and record keeping may be required to report to the responsible body or the local authority on the state of the habitat. The land manger is likely to incur VAT on some or all of these costs.  In a worst-case scenario, the land manager may need to replace any schemes that have “failed” and could incur substantial costs, if such a need arises. 

In principle, for VAT registered land managers, these input VAT costs should be recoverable – they are attributable to the original sale of units for a capital sum plus VAT. However, two potential issues may arise for the original Land Manager.

Looking forward over the decades, there a risk that HMRC may question whether the costs are properly attributable to a standard rated (or other taxable) supply. Provided the original records are available, any questions raised by HMRC can be addressed. Problems could arise without those records. The usual rules for keeping VAT records require taxpayers to keep records for six years. Here any land manager would be well advised to hold the records of the standard rated supply and VAT recovery over the thirty-year life of the BNG units.

The second issue is VAT registration/deregistration. VAT registered businesses can recover VAT that they have incurred on costs. Businesses that are not VAT registered bear the cost of any VAT that they incur. If the VAT registered entity no longer makes or intends to make taxable supplies, it should deregister. A land manager that has created habitat and sold all its BNG units might not intend to make any supplies for VAT purposes in future and so be obliged to deregister. If the Land Manager deregisters, it is no longer open to them to recover VAT on their maintenance and upkeep costs. Where possible, land managers should make supplies of their BNG units and other taxable supplies (e.g. farming) from the same VAT registration. Where there are ongoing taxable supplies for VAT, HMRC should not insist on deregistration.

New owners

The land forming the site of the BNG units may be sold or otherwise transferred to a new owner during the course of the thirty-year obligation. The obligations to maintain and upkeep the biodiversity are likely to pass to the new owner with the land (unless an alternative structure has been set up).  Any new owner should consider whether they can recover VAT on their ongoing BNG costs.

New owners that acquire the land, obligations and VAT registration of the original land manager, should be able to recover VAT incurred on their upkeep and maintenance costs. This could be the case if there is a transfer of a going concern of the business.

If a new owner has a separate VAT registration (or in not VAT registered) and purchases the land taking on the upkeep obligations, VAT on these ongoing costs would be irrecoverable and a cost to the new owner.

Conclusion

Land managers using land for BNG units should consider the VAT treatment of both their up-front costs and the costs to be incurred over thirty years. VAT should not be an additional cost where records are maintained over the life of the BNG project and the land manager remains VAT registered.