Carbon credits: Tax position – more questions than answers?

Carbon credits: Tax position – more questions than answers?

The Scottish Government has committed to achieving a Net-Zero society by 2045 and is increasing investment in rural areas with new schemes to support a decarbonised economy.

One angle to consider is Scottish Forestry’s offer of financial support for woodland creation and sustainable management of existing woodland through the Forestry Grant Scheme.

How it works

Following the decision to create woodland, the landowner must have it registered, assessed, and validated. During the establishment of the woodland, Pending Issuance Units (PIUs), a promise to deliver prior to verification, can be sold. Despite the woodland not sequestering the full amount of carbon the year it is planted, there is value in the sequestration potential once fully grown. After certain growth targets are met, PIUs can be verified and converted into Woodland Carbon Units (WCUs).

Tax Position: Exempt? Income tax? Or Capital Gain?

There is currently no specific guidance from HMRC on this matter, but there are arguments for the following.

  • Exempt: 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. Is revenue that occurs from carbon sequestration viewed as income from commercial woodland?
  • Income: Is the sale of the PIU seen to be the promise to deliver carbon sequestration and, therefore, the delivery of a service and subject to income tax or corporation tax?
  • Capital: Is it a sale of a capital item and therefore subject to Capital Gains Tax (CGT)? The sale of standing timber is exempt from a charge to CGT. However, what are we actually selling?

With the current taxation rates varying hugely from nil to 46%, depending on what the income is classified as, in the eyes of HMRC, the cost of getting the structure wrong can be significant. Early advice is highly recommended.

Email Douglas Home & Co Director, Victoria Ivinson, victoriai@dhco.co.uk, for advice on effectively structuring your business to utilise tax advantages.

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