After an extended period of consultation, HMRC has issued a technical note confirming the tax treatment of ecosystem services (14 May 2026 Technical note on ecosystem services – GOV.UK). The note considers the various scenarios where ecosystem services are in use: property developers; buyers and sellers of both regulated and voluntary carbon credits and landowners who dedicate land to producing carbon credits.
The guidance covers BNG, nutrient neutrality, the Woodland Carbon Code and the Peatland Code. As expected, the general principles of tax prevail and, other than where the Woodland Carbon Code applies, payments for ecosystem services are likely taxable income and expenditure incurred in producing that income is likely deductible. The below is a summary of HMRC’s views.
For property developers carrying on the trade of property development and who need to ensure BNG or nutrient neutrality, payments made to secure BNG or nutrient neutrality will, subject to the application of general tax principles, be tax deductible as being incurred in the production of the trade.
Purchasers of Carbon Credits to off-set carbon emissions arising in the course of their trade, can deduct that expense in the normal course of trading. If they sell that Carbon Credit, the income received will be trading income.
Intermediaries who buy and sell Carbon Credits and hold them as trading stock, will be taxable to income earned on that trade and can deduct the expenditure incurred.
Income received from the provision of ecosystem services is normally income in the hands of a landowner. An argument for capital treatment will require a case-by-case assessment. HMRC make it clear that a lengthy commitment to provide ecosystem services, whilst relevant, is not the only factor to take into account when making the case for capital treatment.
Certainly, the note provides a clearer picture on the tax position of all parties involved in the provision and consumption of ecosystem services. For landowners, the success of habitat recovery schemes is partially dependent on the tax treatment of the scheme. Early advice on the structure to be implemented is critical to ensure that the full picture is considered as a whole and the veracity of the scheme is fully tested.
If you would like any further information or would like to chat to one of our corporate tax experts please call Cathy Bryant or Anthony Reeves. Please look out for the next article in our series on Taxing Nature which will focus on capital taxes for landowners.
