Understanding the tax rules for ecosystem services

The CLA has been actively calling for greater clarity on the taxation of payments for biodiversity net gain (BNG) units, carbon credits and nutrient units. Progress has been slow but after many delays the government established a joint HM Treasury and HMRC with industry representatives, including the CLA, to clarify the tax treatment.

This working group met throughout 2025 and those deliberations have led to the recent publication of a technical note on ecosystem services by HMRC.

The technical note sets out HMRCs approach to the taxation of various payments made by developers and others to landowners for the provision of ‘ecosystem services’. This includes payments for BNG, nutrient credits and carbon credits from woodland and peatland. The note covers the implications for income tax, corporation tax, capital gains tax and VAT, as well as stamp duty land tax and inheritance tax.

It’s important to remember that for VAT, CLA members that are entering into agreements to sell BNG or nutrient units or carbon credits should ensure the agreement includes a contract term on VAT. Failure to specifically state that VAT is to be paid in addition to the agreed sum for the units or credits will mean that the price is deemed to be inclusive of VAT. This means that where they are sold by a VAT registered business, that business will have to account to HMRC for 20% of the sum received as output tax.

This guidance is a useful first step, but it will need to evolve as the market does. BNG units and carbon credits are relatively well established, but there is ongoing evolution in government policy and market demands that may change what is needed and how it’s delivered in the future.

This tax guidance therefore cannot be treated as job done. We will continue to work with HMRC to help them keep the guidance up-to-date, relevant and workable in practice.