Clause 127 - Aggregates levy: amendments to provisions exempting spoil etc

Finance Bill – in a Public Bill Committee at 10:30 am on 25th June 2002.

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Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport) 10:30 am, 25th June 2002

I beg to move amendment No. 255, in page 101, line 6, at end insert—

'(1) In section 17(1) of the Finance Act 2001 (c. 9) (aggregate that is exempt), at end insert ''except water''.'.

Photo of Joe Benton Joe Benton Labour, Bootle

With this it will be convenient to take amendment No. 256, in page 101, line 19, at end insert—

'(2A) In section 17(4)(c) of that Act insert—

''or

(iii) the production of aggregate.''.'.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

I hope that amendment No. 255 finds favour with all members of the Committee. It would

make water exempt from the aggregates tax. The Government never said anything about wanting to tax water but, effectively, that is what is happening under the present arrangements. Customs makes an allowance for water added through washing or dust dampening but apparently is unable to make any reduction to take account of naturally occurring water—rainwater and groundwater. That imposes a disadvantage on quarries that extract aggregates from below the water table. Obviously, it is a big disadvantage for dredged aggregate as well.

This is not some mere academic debate. The total amount of the levy that is payable by a wet quarry is about 7 per cent. more than for a dry quarry. I hope that the Economic Secretary can explain why the Government feel it appropriate to tax the water content of aggregates. Surely that was not what they intended initially.

A consequence of the present regime is that every one of the 488 businesses registered for the levy has been visited by Customs officers who have tried to draw up site-specific formulae to calculate the levy for each quarry, taking into account how much of the aggregate is wet and how much is dry, and the reason that it is wet rather than dry. That adds enormously to red tape, bureaucracy and compliance costs. We understand that the compliance costs are 30p per tonne for the average small quarry.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

As my hon. Friend has considered the subject closely, would he clarify whether brine taken from above ground to extract salt is affected by the levy in the same way?

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

My hon. Friend might be better putting that question to the Economic Secretary, who has all the power of the Customs and Excise officialdom behind him. I am sure that my hon. Friend, having given notice of his interest in the matter, will be able to get a reply from him, and I am grateful for the support that my hon. Friend gives by implication to the amendments.

Amendment No. 256 would ensure that the levy was not payable on waste by-products. Secondary aggregates are an unavoidable by-product of the extraction of industrial grade aggregates. For example, it can take up to six tonnes of throughput to achieve one tonne of industrial-grade limestone. Quarries must sell their secondary aggregates at the market price, often less than £1 per tonne, to maintain operating space within quarries and avoid unsightly spoil heaps. Obviously, there is a big contrast between the treatment of waste by-products coming from the quarrying of aggregate and the way in which slate waste is being treated, because disused slate quarries are being opened up in order to provide a new source of what is called virgin aggregate. The Economic Secretary has referred to the enormous investment made by McAlpine, which will probably damage the environment due to the transportation of slate waste over hundreds of miles of the English countryside in order to avoid paying the aggregates tax.

Surely, if the waste from slate is exempt from the levy because it is a waste by-product, the waste from

the production of aggregate and limestone should also be exempt so that such waste does not pile up in great spoil heaps throughout the country, which is likely under the present regime. There should be a proper incentive for the producers of that waste to dispose of it in the marketplace at a price that the market can bear. If the market price is less than £1 a tonne and has to compete with slate waste, the imposition of a levy of £1.60 per tonne plus VAT would result in the accumulation of large tips of waste aggregate. I hope that the amendment will find favour with the Government. Can anyone be in favour of fiscal incentives to establish spoil heaps in the countryside where they do not exist at the moment?

Photo of Chris Grayling Chris Grayling Shadow Minister (Health) 10:45 am, 25th June 2002

Good morning, Mr. Benton. I should like to follow on briefly from the comments made by my hon. Friend the Member for Christchurch (Mr. Chope). We must draw to the Economic Secretary's attention the fact that the debate is effectively about recycling. Although one cannot recycle the by-products of quarrying in quite the same way as the products of other processes, it would be extremely foolhardy to tax the recycling of aggregate waste out of existence and, as my hon. Friend says, create spoil heaps in the countryside.

In addressing the issue, would the Economic Secretary set the debate in the context of recycling, and give a sense of the Government's view of good environmental practice in the aggregates industry and how they intend to incentivise and encourage that? Having raised the issue with my hon. Friend the Member for Christchurch rather than intervening on the Economic Secretary, I wonder whether he would address that question. There are several processes by which the product of an industrial process is extracted from water that is often taken from below ground, and there is a disposal element to that. One can also find waste products alongside the finished product—salt, for example, and the water that comes out. There is a danger that those products will be lumped together when assessed for the aggregates levy. I should be grateful if the Economic Secretary would address that point.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I shall deal with amendments Nos. 255 and 256 and the several points raised by the hon. Gentlemen, and in so doing explain the basis of clause 127 more generally for the Committee.

Amendment No. 255 is designed to tax aggregate by its dried weight, as the hon. Member for Christchurch described, even though that is not how it is normally supplied by the industry to its customers. Indeed, there are questions concerning how practicable and possible it would be to establish the moisture content for each consignment of aggregate in order to discount the naturally occurring water weight from the weight of the aggregate and therefore levy the tax in the way that the hon. Gentleman advocates. There is a practical question at stake.

However, more fundamentally, there is no case for the amendment because the current tax treatment of naturally occurring water, or any other substance that occurs naturally with the aggregate, reflects the practice in the industry. The industry sells by the tonne whether the aggregate is wet or dry. To move

away from that practice would increase complexity and undoubtedly result in increased compliance costs for the industry. To be clear, the tax is not on natural water, but on the weight of aggregate, of which naturally occurring water is an indivisible part. If I may say so to the hon. Member for Epsom and Ewell (Chris Grayling), water that is not rainwater or naturally occurring water in the aggregate but, perhaps, brine, would be treated in the same way and weighed as part of the total aggregate load on which the levy would be payable.

In summary, I urge the Committee to consider that amendment No. 255 does not recognise commercial practice, where suppliers sell a tonne of aggregate, wet or dry. It would introduce complexity into the process and inevitably add to compliance costs for the industry itself.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

If that is correct, why is Customs and Excise making a special exemption for aggregate suppliers that choose to wash their aggregate as a natural part of marketing it, and why, where the aggregate is damped down artificially to stop dust developing, is the water used in that process subject to an exemption against the tax?

Photo of John Healey John Healey The Economic Secretary to the Treasury

If the hon. Gentleman has constituents who live near operations like this or has visited such operations, he will understand that the dampening down process is highly valuable for local residents because it reduces the dust that lorries introduce into the local environment. It is an additional process with a valuable environmental impact and it is right that we take it into account as a process not related to extraction. We have developed our proposals on that in consultation with the industry, which has broadly welcomed them.

If I may say so to the hon. Member for Epsom and Ewell, the principal environmental impact of the levy lies in its very purpose, which is twofold. Its purpose is, first, to reduce reliance on the quarrying and extraction of virgin aggregates and, secondly, to do that principally by encouraging, through building in fiscal incentives, the industry and its customers to find recycled and alternative materials, which will allow us to scale down the quarrying of virgin aggregates. Alongside that is a determination to build some of the environmental costs of quarrying into the price and cost of quarrying, as I explained to the Committee during the last sitting.

That is the purpose and rationale of the levy and we are starting to see its impact. I quoted the response of McAlpine. A number of other companies are responding to the new regime in a similar way and that is, I think, helping us to feel confident that the levy will achieve its environmental objectives following its operation from 1 April this year.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

Given that some quarrying will inevitably continue to take place—not all quarrying can be replaced by recycling—what measures is the Economic Secretary proposing, within the framework of the levy or elsewhere, to encourage good environmental stewardship by producers still extracting from the ground? How will this measure,

which seems to tax the smart disposal of the inevitable by-product of their quarrying, help that process?

Photo of John Healey John Healey The Economic Secretary to the Treasury

I fear that the hon. Gentleman has taken the discussion well beyond the particular purposes and details of the clause into much more general environmental policy. Clearly, within the purposes of the provision and the clause, the levy is designed to have the impact that I stated. It is not designed to have a direct impact on the quarrying practices of suppliers in the industry and the techniques that they use.

The hon. Member for Christchurch asked why limestone waste is not afforded the same treatment as other industrial mineral wastes such as china clay. The answer is threefold. Limestone is not included in the list of exempt industrial minerals in section 18(3) of the Finance Act 2001 because it is an aggregate. The material arising from limestone extraction is, in reality, low-grade primary aggregate rather than true waste and is often used and sold as such. Genuine waste will not be subject to the levy. As it will not be sold, it will not be commercially exploited. However, if limestone is used for a prescribed industrial or agricultural process rather than as an aggregate, it is relieved under section 30 of the 2001 Act.

Let me deal with amendment No. 256 and, in so doing, explain the purpose of and provisions in clause 127. The clause deals with two separate matters. First, it amends the aggregates levy legislation to make taxable the overburden—the top layer of material that must be removed before a mineral can be worked—from china clay and ball clay extraction. Secondly, the clause contains a provision to exempt waste from the processing of all industrial minerals that are exempt from the levy. Previously, coal, slate, china clay and ball clay were covered. The clause brings into the exemption provision minerals such as fluorspar and other small-quantity minerals that are extracted. The changes will encourage the use of aggregates unavoidably produced in the process of extracting industrial minerals and help to ensure consistent treatment of mineral waste under the legislation.

Amendment No. 256 would exempt any waste, spoil or by-products arising from the production of aggregate and, therefore, subvert the purpose of the clause. The Government conducted the development of their plans for the aggregate levy and their preparations for its implementation on 1 April in a very open and consultative spirit, with regular meetings with the industry, trade associations and other interest groups. In keeping with that, there have also been detailed discussions with the aggregates industry on a suitable definition of waste aggregates or aggregate by-products. To date, the industry has been unable to provide us with a suitable alternative, comprehensive definition.

Quite simply, the reason is that it is difficult to produce a clear and consistent dividing line or borderline between what is and what is not waste. Aggregate quarries produce rock, sand or gravel. Therefore, any rock, sand or gravel that can be used as aggregate and sold as such is not waste but an

aggregate. It is only correct that the purchaser pay the environmental costs associated with its extraction; therefore, it is covered by the provisions of the levy.

Sometimes, quarry owners may describe some of the aggregates that they sell as by-products because they regard them as incidental to the production of their main or higher-value products, on which they make larger profits. However, exactly the same aggregates may be a main product from another quarry. In other words, one man's by-product or waste may be another man's main product. It would be unfair and distorting to base liability for the levy on whether the quarry owner regards such material as a by-product. Genuine waste materials will not be commercially exploited and, therefore, will not be subject to the levy.

Moreover, as we announced in the pre-Budget report in 2001, the Government continue to examine with the industry whether it is possible to deliver additional environmental benefits through the aggregates levy by encouraging the more general and positive use of true waste aggregates that would not otherwise be commercially exploited. On that basis, I hope that the hon. Member for Christchurch will feel moved to withdraw the amendment. If he is not prepared to do so, I ask the Committee to reject it.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport) 11:00 am, 25th June 2002

Dealing with amendment No. 255 first, the Economic Secretary explained how naturally occurring water in aggregate is part of the system, and how aggregate is weighed and sold by the tonne with as much water as there happens to be in it. He went on to explain the fiendishly complicated calculation that Customs and Excise had brought in to work out how much water has been put into aggregate in order to reduce the incidence of dust. He said that there was an environmental benefit in the reduction of dust, which we would endorse absolutely. What he did not address were cases when aggregate is washed and sold wet, having been washed to make it more saleable. It may be sea-dredged aggregate that has been washed. Why should there be a special allowance for aggregate in that washed state when there is no allowance for aggregate from beneath the water table? I am not convinced by the Economic Secretary's explanation on that.

On amendment No. 256, the hon. Gentleman says that the aggregates industry has been consulted. Perhaps I could tell the Committee of something that I was informed about this morning by the British Aggregates Association. It says that there was a court case in front of the European Commission when the application for state aid approval in relation to Northern Ireland was considered by the Commission. The Commission's judgment reached the conclusion that it would be reasonable to allow state aid approval for Northern Ireland, but it also—more interestingly—reached the conclusion that the whole United Kingdom regime was state aid because of the differential impact that it has on different parts of the industry. As one can see from the examples that we have talked about, that is particularly true of the slate industry.

The Government have introduced a fiscal regime that will give an incentive for virgin slate to be quarried and to be used in place of aggregate waste. It will be transported hundreds of miles across the country to enable that to happen. How can that be sensible? It is surely a distortion of the market. How can the Government assert that it is a good thing to have a slate quarry operating, but not a limestone quarry, or that it is a bad thing to quarry virgin limestone but acceptable to quarry virgin slate? That does not make sense.

The European Commission produced its findings on the matter in April. The Government were given 14 days in which they were allowed to indicate whether they felt that the draft judgment should be made publicly available. They did not say anything, and it is only in the previous 48 hours or so that Customs and Excise has agreed with the British Aggregates Association that the draft judgment should be published. The draft judgment shows that the European Commission's view is that the whole regime and structure involves state aid. It has given approval to that, but the Government have hitherto argued that the only element of state aid was in so far as it affected Northern Ireland. Needless to say, that will be the subject of further litigation in the courts, but I think that it drives a coach and horses through the Economic Secretary's suggestion that he is actively consulting the aggregates industry. The industry urged Customs and Excise to give permission to publish the judgment at the end of April but it is only now, towards the end of this Committee, that that permission has been granted. It is significant and exemplifies the responsibility of the British Aggregates Association that it did nothing that it was not authorised to do and sought approval from Customs and Excise first.

Opposition Members feel that we should not countenance legislation that will encourage the mining and crushing of virgin slate while at the same time encouraging the dumping and accumulation of waste aggregate. That encapsulates our arguments in support of amendment No. 256.

Photo of John Healey John Healey The Economic Secretary to the Treasury

Before the Committee perhaps divides on the amendment, I would not want it to be under any misapprehension on a matter as important as the proceedings and judgments of the European Commission, which Conservative Members follow closely. The High Court, in the judicial review proceedings brought by the British Aggregates Association to which the hon. Member for Christchurch referred, found that the exemption was not a state aid. The Commission ruled that the levy does not contain any state aid, contrary to the information supplied to the Committee by the hon. Gentleman, apart from the phasing in of the levy in Northern Ireland, which is accepted by the Commission as a permitted state aid under environmental guidelines of which the European Commission is the custodian. I hope that that clarification has set my hon. Friends' minds at rest.

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 18.

Division number 7 Adults Abused in Childhood — Clause 127 - Aggregates levy: amendments to provisions exempting spoil etc

Aye: 10 MPs

No: 18 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Clause 127 ordered to stand part of the Bill.

Clause 128 ordered to stand part of the Bill.