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The lack of guidance from HMRC is “hampering net zero progress”, according to an accountant at Scottish firm Douglas Home and Co.
Victoria Ivinson of Douglas Home and Co, has called for carbon taxation legislation to keep up with the “rocketing” demand and activity in the market.
Ivinson, who is a chartered accountant and head of Agriculture at Douglas Home and Co, said that new land use is taking root in rural Scotland driven, in part, by carbon offsetting.
She said: “What’s already clear is that our beloved rural areas are playing a huge role in Scotland’s target to reach net-zero greenhouse gas emissions by 2045. As a rural accountancy firm dealing with landowner businesses, we’re told on a near daily basis of the level of enquires from interested suitors. However, those seeking to make the most of Scotland’s carbon opportunities must navigate a confusing taxation landscape.
“With no specific guidance from HMRC on how these carbon credits should be taxed, this lack of clarity and certainty only serves to hamper the carbon trading market and impact net-zero targets.”
She added that landowners looking to create woodland carbon units, must have the units registered, assessed and validated. During the establishment of that woodland, Pending Issuance Units (PIUs), a promise to deliver a future carbon offset, 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 at that stage. After certain growth targets are met, at 5 year increments, PIUs can be verified and converted into Woodland Carbon Units (WCUs), which can also be sold.
Ivinson added: “Many argue there should be an exemption from taxation – currently, income that arises from commercial woodland occupied with a view to the realisation of profits is exempt from a charge to income or corporation tax. However, should revenue that occurs from carbon sequestration really be viewed as income from commercial woodland? It is not a physical product being sold, only the mere promise of a future delivery, which may fail to come to fruition.
“Lastly, are carbon credits subject to capital gains tax? While the sale of standing timber is exempt from this charge, there is no clear understanding on whether carbon credits should be treated as capital items, can it really be seen as capital when no capital asset is being sold? Naturally, it would benefit landowners and organisations if carbon credits were exempt or at the very least subjected to a lower tax rate.”
She concluded: “Without proper guidance from HMRC there is a danger these groups could be exposed to huge variations in taxation rates depending on how the income from PIUs and WCUs are classified. Getting the structure wrong could be extremely costly – with income tax rates varying anywhere between nil to 46%.
“We need legislation to address this grey area, if we are to enable this emerging market to flourish. In the meantime, we can only plan as we see fit.”
Headquartered in Kelso, Douglas Home and Co has offices in Alnwick, Edinburgh, Haddington, Hawick, Melrose and Penrith. In addition to offering core accountancy and tax services, the firm has teams specialising in audit and assurance, business compliance, personal estate planning and IT services.
