HMRC published its long awaited technical note on the taxation treatment of income and expenditure on biodiversity net gain (BNG) units, nutrient neutrality and carbon credits on 14 May 2026. It treats all such activities as the provision of ecosystem services.
As usual, each case will turn on its own facts but the general principle is that, if the units and/or credits have been created as part of a trade or business – such as where a farmer creates BNG units for sale on part of the farm – the income from sales of BNG units will be taxed as trading income and the expenditure incurred in creating them will be allowable as business expenditure. Capital allowances will also be available for any qualifying plant and machinery, such as package treatment plants that have been installed to create nutrient credits.
Where farmers and/or landowners have leased their land to a third party and it is the third party that has created the credits or units, the lease payments will be treated as income from property and not trading income. However, any expenditure on professional advice, legal agreements and infrastructure may still be allowable expenses. Further, if the farmer or landowner is being paid to provide land management services, that income will be treated as trading income and taxed accordingly.
Where there is stacking – on which see more here – HMRC says that each element should be considered separately to establish if income is trading or non-trading.
The taxation of income from woodland has its own rules, which will continue to apply. Where the woodland continues to be occupied for commercial purposes, the taxation of income from the sale of woodland carbon code credits will be treated in the same way as the income from standing timber sales.
HMRC has also confirmed that the provision of ecosystem services is subject to VAT.
The technical note is essential reading for those active or wishing to be active in the ecosystem services market and their professional advisers and can be found here.
