In our article from June 2025, we looked at what Biodiversity Net Gain (BNG) is, how this can be achieved and commented on the tax treatment of receipts from selling units to developers. It was noted that charities were in discussions with HM Revenue & Customs (HMRC) with respect to some uncertainties. The Charity Tax Group has released an update with the latest news, and this is summarised below.
HMRC have confirmed that where a charity has objects which include “the advancement of environmental protection or improvement” then if it is selling BNG units, by using its own land to create a suitable habitat bank, the income would be treated as primary purpose trading. If the charity has different objects, then it is likely that this will be non-primary purpose trading income, so subject to corporation tax.
The latter charities may wish to use a subsidiary to contain this activity to shelter profits under the corporate Gift Aid mechanism. However, that subsidiary would need to have an interest in the land being used for the habitat. As ever, it would be important to consider the distributable reserves and cash position of the subsidiary to ensure as much of the taxable profits as possible can be sheltered using a cash donation to the parent charity.
The charity would need to fund the subsidiary and needs to ensure that the investment would qualify as an approved charitable investment/loan, so the estimation of costs involved (including any tax exposure) is important.
As the BNG projects last at least 30 years, it will be vital that charities and their subsidiaries carefully consider the costs involved, to ensure they are not in the position where they make a loss on the activities. The tax position will follow the accounting.
The accounting position will depend on the nature of the contract between the developer and the habitat provider, for example if there are performance obligations it may be possible to defer the recognition of some of the income.
If there are no such conditions then we would expect all of the income to be recognised upfront. The contract will commit the habitat provider to incur significant costs, which can be provided for in the accounts.
However, provisions must meet certain requirements to be recognisable, for example the estimate must be reliable, and given the length of the contract, the costs would need to be adjusted for the time value of money.
Some charities may not undertake the habitat creation themselves, but assist other landowners in this area. Again, the contracts which generate income from this type of activity will need to be reviewed to see if this would be primary purpose or non-primary purpose trading.
Next Steps
Please get in contact with us to understand fully how these updates might impact your charity.
Please note that this content is not intended to give specific technical advice. It is designed to highlight some of the key changes rather than provide an exhaustive explanation of the topics. Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.
