A taxing question

Although tax relief for asbestos removal was introduced more than two years ago, ARCA members are still unsure as to how the government scheme benefits them. Tim Wood explains the system and talks to one company that has benefitted.

A taxing question TAX RELIEF After years of talking up its commitment to urban regeneration, the government finally put its money where its mouth was four years ago.

As part of its strategy to bring brownfield sites back into use, it introduced 150% tax relief for companies incurring expenditure on land remediation, including buildings. This meant the costs of asbestos removal from existing buildings could be set against company’s taxable profits.

For example, if £50,000 is spent on removing asbestos, £75,000 can be knocked off taxable profit. Part of the professional fees, preliminaries, survey fees and possibly the reinstatement expenditure could also qualify, depending on the nature of the project.

'The costs of asbestos removal from existing buildings can be set against a company’s taxable profits.'

Companies that met the requirements set out in the legislation have been able to claim the relief on expenditure from May 2001 on the remediation of contaminated land.

But there are caveats. The company must not have been the original polluter of the land and must be a UK-registered company – individuals, partnerships and overseas companies are excluded from the scheme. The company must not receive any form of subsidy, such as a grant towards the clean up of the land. This can lead to grey areas if the original sum paid for the land was reduced because it was contaminated. As with most tax incentives, the process is complicated and can be misunderstood. No case law exists that clearly explains all the works that qualify.

But asbestos definitely does qualify. Why? Because the tax relief is available where substances are in, on or under the land, which cause harm or there is a possibility of harm being caused. The definition of harm means harm to the health of living organisms; interference to ecological systems; offence to the senses of human beings, and damage to property.

'150% tax relief is available on the remediation of contaminated sites.'

The costs allowable are not only for the remediation, but in addition, ‘add on’ costs. These can be the professional fees, site preliminaries, landfill tax, pre-surveys and anything similarly related to the clean up of the land. These add-ons can increase the value of a claim by up to 50% of the costs of the actual remediation works.

The costs of replacement materials may also be allowed in certain circumstances. The extent will depend on the nature of the development and the reasons for the work being carried out.

This tax relief may improve the options when considering what actions to take when dealing with remediation of asbestos in a building. The relief should not determine the action taken, but any possibility of claiming it on replacement materials may change the long-term objectives.

The amount of relief depends on several issues, not least the rate of tax paid by the claimant. To a developer paying tax at 30%, the tax relief is equivalent to 15% of the land remediation expenditure, whereas for an investor or owner-occupier paying an equivalent rate of tax, the relief is equivalent to 15% to 45% of the land remediation expenditure. If the qualifying expenditure creates a loss, the company may surrender the loss in exchange for a tax credit equivalent to 16% of that loss.

The tax relief is claimed via the tax return. An important aspect of making a claim is to have sufficient information to prove the entitlement to claim.
As a minimum the information required will be:

• details of the expenditure including invoices, names of subcontractors, details of labour and material costs;
• the trade and tax rate of the company;
• confirmation that the land was acquired in a polluted state and no subsidises received;
• copies of surveys and environmental reports where available;
• purchase agreement; and
• validation reports and methodology of the remediation.

The type and amount of information will depend on the works undertaken. Where possible, collating this information during a project is an ideal situation, rather than after the project has been completed.

A developer receives the relief on the sale of an asset, an investor or owner-occupier in the year of expenditure. A tax credit can be issued on account depending on circumstances.

The tax relief initiative should have a major financial impact for both property owners and developers and will help measure the monetary impact of alternative renovation proposals.

'This tax relief may improve the options when considering what actions to take when dealing with remediation of asbestos in a building.'

HOW THE SYSTEM WORKS IN THEORY
Based on an imaginary 1960s office building purchased by an investor which requires refurbishment, including the removal of asbestos:

HOW THE SYSTEM WORKS IN PRACTICE

One example of a contractor that has successfully made use of the tax relief available for land remediation is Hertfordshire-based Caswell Environmental Services.

The firm has completed various projects through which building owners have been able to claim tax relief under the scheme.

Caswell acted as the principal contractor for the asbestos removal and decontamination project at a south coast retail site leased by one of the rising stars of the UK retail scene from one of Britain’s oldest established retail names. The project involved soft stripping the three-storey building back to its shell, as well as fire protection reinstatement work. Originally scheduled to last five weeks and involve 24-hour working, the programme of works was brought in a week early to the full satisfaction of the client.

The contractor had submitted a quotation for asbestos removal and demolition works to a total value of £520,000. Although the costs were incurred by the building owner rather than the leaseholder, the owner was able to offset £300,000 of the asbestos removal cost against their total project costs under the tax relief scheme.

Caswell is undertaking two further projects of this nature and is assisting the clients concerned to reduce their real costs by taking maximum advantage of the scheme.

“We see the scheme as offering a true benefit to clients in real cost terms,” says marketing director Lee Caswell. “It also gives positive encouragement to companies to undertake the removal of asbestos and put existing buildings to valuable new use, which is in the long-term environmental interests of everybody.”

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