This month marks the one-year anniversary of BNG becoming mandatory for major developments, with smaller developments following a couple of months later. So, what have we learned from the past year, and where are we now?
BNG is of relevance not only to developers but also potentially to farmers and other landowners seeking to diversify or to find other ways to generate income from their land, especially with the changes to the agricultural subsidies and the move away from the Basic Payment Scheme towards more environmentally focused subsidies.
What is BNG?
BNG was, of course, not “new” in February 2024, but prior to that date, adoption was voluntary.
Under the mandatory BNG framework, unless the development is exempt, developers must be able to demonstrate a 10% BNG as a result of the development, the biodiversity gain being measured by the statutory biodiversity metric, essentially meaning areas of habitat creation.
Where possible, that habitat creation should be “on-site” as part of the development, such as including woodland or a pond within an area of new housing.
Where this is not possible, or the developer deems it to be too costly, they can deliver the required BNG through off-site biodiversity gains on their own land outside the development site or by buying off-site biodiversity units on the market.
Is BNG here to stay?
This last year has seen a change of government, with the incoming administration staking a considerable amount of political capital on house-building targets and infrastructure development, so will the BNG requirement be quietly removed as a barrier to growth?
Just before Christmas, the government produced its Planning Reform Working Paper. At the heart of the proposal was a new Nature Restoration Fund aimed at streamlining the building process by allowing developers to pay into this central fund rather than undertaking site-specific assessments and mitigation.
It is not currently clear how this new fund will interact with the existing BNG requirements, although the working paper did state that “these proposals are not expected to have any substantive impact on the implementation of mandatory BNG” and that the government “continues to fully support” the developing private marketplace for off-site biodiversity units.
Full details of the proposals are still awaited.
The “off-site” BNG market
If the proposed changes are causing uncertainty for developers, so too are they for landowners looking to utilise land in the growing natural capital markets, which currently include schemes such as woodland and peatland carbon credits and nutrient neutrality, as well as BNG.
The supply of off-site units is seen to be integral to the operation of BNG, and supplying these units has the potential to offer a new source of revenue for farmers and other landowners looking to diversify.
This last year has seen some growth in the amount of land coming on to site register as well as a growing number of responsible bodies designated by DEFRA to act as intermediaries between the developers and the landowners to deliver the conservation covenants, but uptake so far has been relatively modest.
Accounting and Tax issues
For the developer, the treatment of the BNG costs is fairly straightforward, being a cost of the development.
There is, however, still a great deal of uncertainty around the accounting and tax treatment of sums received from the sale of off-site BNG credits.
The payment for the sale of BNG credits usually takes the form of a lump sum received up front, but the project is very long-term, usually 30 years or more. So, are the sums received income or capital, if income do they class as “trading”, are they taxed on receipt or spread out over the period of the project to match the ongoing costs? What is the VAT position, and how is BNG land classed for Inheritance Tax?
These questions are amongst those currently being considered by the new Ecosystems Service Markets Technical Working Group, which met recently and includes industry representatives as well as members of the various taxation and accounting bodies. With four more meetings scheduled for 2025, we can only hope that the much-needed guidance in this area will be issued soon.
So, one year on from the implementation of mandatory BNG, there are many areas of uncertainty and further details are awaited. It will be interesting to see where we are in another year’s time!
If you would like more information, please contact Kirsty Swinburn.
