HMRC Brings Clarity to the Taxation of Ecosystem Services

The growth of environmental markets has created new opportunities for landowners, farmers and developers, but it has also raised important tax questions. HMRC’s Ecosystem Services Technical Note, published on 14 May 2026, provides welcome guidance on how a range of ecosystem service arrangements should be taxed. These include biodiversity net gain (BNG), nutrient neutrality schemes, woodland carbon credits and peatland carbon projects.

The guidance confirms that there is no single tax treatment for ecosystem service payments. Instead, the outcome will depend on the specific facts and circumstances of each arrangement. HMRC considers that many payments received by landowners are likely to be taxable as income, particularly where the activities form part of an ongoing farming or land management business. However, in some cases a capital treatment may apply, meaning careful analysis is essential before agreements are entered into.

The note also highlights wider tax considerations, including VAT, inheritance tax and SDLT. For developers and businesses purchasing biodiversity units, nutrient or carbon credits, the availability of tax deductions and the treatment of associated expenditure will be key factors in assessing project viability.

For Our Clients, the Message is Clear

Tax should be considered at the planning stage rather than as an afterthought.

Ecosystem service agreements can involve long-term commitments, changes to land use and significant commercial value. Understanding the tax consequences from the outset can help avoid unexpected liabilities. It can also ensure that environmental opportunities deliver the intended financial benefits. As environmental markets continue to develop, obtaining specialist advice remains crucial to achieving both commercial and tax-efficient outcomes.

Here at Whitings, we can provide that expert assistance. For more information or advice, get in touch with your usual Whitings contact or your local Whitings office today.