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HMRC internal manual

VAT Business/Non-Business Manual

Specific issues: landfill tax credit funded environmental schemes


Landfill tax credits

Landfill tax is a tax per tonne of waste disposed of at licensed landfill sites. Landfill site operators account for the tax.

The environmental bodies’ credit scheme lets landfill site operators claim a credit against their tax liability. The credit is equal to 90% of the value of contributions they make to approved environmental bodies. However, they can only claim a credit for up to 20% of their annual landfill tax liability.

Approved bodies and schemes

For a credit to apply the contribution must be made to an approved body carrying out one or more of a number of approved objects. The primary law for landfill tax which allows regulations to be made which set the approval criteria is laid out in Finance Act 1996. The criteria are found in the Landfill Tax Regulations 1996 (No 1527).

Regulation 33(1) covers approval of bodies. Regulation 33(2) covers the approval of its objects. A regulatory body, ENTRUST, which issues an enrolment number to bodies that meet the criteria, carries out approval of bodies.

Regulation 33(1) includes the following conditions for bodies seeking approval:

  • the body must be precluded from distributing any profit;
  • the body applies all income (and profit) to the furtherance of its objects;
  • the body may not apply any funds for the benefit of persons contributing to it;
  • it cannot be controlled by local authorities or landfill site operators.

Regulation 33(2) lists a number of approved objects. These include:

  • reclamation work on contaminated land;
  • research into/projects to reduce pollution;
  • research into waste management;
  • provision of non-profit making public amenities/parks near a landfill site.

Only organisations that are:

  • not controlled by those who may contribute to them; and
  • which undertake non-profit making work of general environmental benefit

  • can be approved. There can be no specific, direct benefit to any contributor arising from their contribution.

    However, it may be that, for example, an environmental body acknowledges the contribution of a landfill site operator in its publicity material. This is not a direct benefit to the site operator unless giving that acknowledgement had been a condition of making the contribution.

    In effect the law prevents any circumstances where the contribution from the landfill site operator can be seen as representing consideration. Consequently no output tax will be due on this money.

    Where a contribution to an environmental body is disqualified because of the direct benefit rule, and landfill tax credit denied, it may be that output VAT will also be due.

    Input tax and landfill tax credit funded projects

    Since the contributions are not seen as consideration, projects solely funded by these payments will not be business for VAT purposes. No tax incurred on the project will be input tax. There is no special VAT treatment for landfill tax credit funded projects.

    VAT can only be claimed on a project to the extent that it is linked to the making of other supplies for consideration. Examples might be:

    • composting projects where compost is sold; or
    • land reclamation projects where the service of improving contaminated land is provided for payment.

    When this happens you should be sure that the making of the taxable supply is the main object of the project and not merely incidental.

    For example a landfill funded research project, designed to have universal benefit, might publish a final report which it sells for nominal charge. HMRC would not accept that all the tax incurred on the research is incurred for the purpose of the booklet sales. In such cases an apportionment is appropriate.