Clause 88 - Aggregates levy: removal of certain exemptions

Finance Bill – in a Public Bill Committee at 10:30 am on 10 June 2014.

Alert me about debates like this

Question proposed, That the clause stand part of the Bill.

Photo of Martin Caton Martin Caton Labour, Gower

With this, it will be convenient to take clause 89 stand part.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Clause 88 suspends those exemptions, including exclusions and reliefs, from the aggregates levy that are subject to a state aid investigation by the European Commission. The exemptions are suspended as of 1 April 2014.

Clause 89, in anticipation of a positive outcome to the European Commission investigation, provides for secondary legislation to reinstate the exemptions, and even to allow for backdated repayments from HMRC to those who have paid additional levies.

The aggregates levy is a tax on the “commercial exploitation” in the UK of rock, sand and gravel—sand, gravel and rock that is dug from UK soil or dredged from the sea in UK waters. Spoil, waste, offcuts and by-products of certain processes are also “aggregate” and subject to the levy. There is one basic rate of levy—£2 per tonne— though lesser amounts incur a smaller levy; so half a tonne of aggregate, for example, incurs a £1 levy. Producers of aggregates in the UK must therefore register and report the quantity of material that they produce and sell to the Government.

The Finance Act 2001, which the previous Labour Government introduced, provided for certain exemptions from the levy. The tax information and impact note informs us that the European Commission at the time decided not to raise any objections to the aggregates levy and, specifically, the exemptions provided for. However, clause 89 is before us today because that decision was annulled by the European General Court on 7 March 2012, with the Commission subsequently carrying out a preliminary assessment of the levy with the aim of determining whether any objections on the grounds that certain exemptions constituted state aid should be raised.

In a written statement on 13 September last year the then Economic Secretary made it clear that the Government disagreed with the view that these exemptions give rise to state aid, and stated:

“The Government are therefore only taking steps to suspend the application of those elements of the levy that now form the subject matter of the formal investigation because they are obliged to do so under article 108(3) of the treaty on the functioning of the European Union.”—[Official Report, 13 September 2013; Vol. 567, c. 65WS.]

HMRC published an interim guidance note in March which aims to clarify what those changes mean for affected businesses. It also sets out exactly what elements, as of 1 April 2014, are now taxable under the aggregates levy. The tax information and impact note suggests these changes will yield an additional £20 million in Exchequer revenue in 2014-15, with absolutely no Exchequer  impact thereafter. The note also suggests that these measures will affect around 200 businesses and hints at potential additional financial costs for affected businesses.

Could the Minister set out the estimated financial impact of these changes on the approximately 200 affected businesses? As for potential significant financial burdens to certain businesses, is the Minister aware of any significant instances where this may be the case, and can she elaborate on what kind of significant burden this will be for those businesses? Turning to the European Commission’s investigation, could the Minister update the Committee on what progress has been made so far? What information have the Government provided to the Commission and has the Commission, at least so far, been satisfied with the information provided? Finally, in relation to the possible outcomes of this investigation, when can we expect a final decision from the Commission? Are we looking at 12 months or potentially longer than that?

Following on from the suspension of levy exemptions, clause 89 provides for secondary legislation to be introduced to enable the Treasury to restore those exemptions, exclusions and reliefs. Critically, it can restore them retrospectively and before the secondary legislation is made. In other words, this will mean that tax paid as a result of the suspension of an exemption from 1 April 2014 until whenever these exemptions are restored—I should say, if they are restored—can be repaid to the person or business who accounted for it. These provisions will be made only following the conclusion of the Commission’s investigation, should the terms of the Commission’s final decision allow such backdated payments and, indeed, if the Commission is satisfied with the exemptions in the first place.

The explanatory notes point out that in order for such payment to happen, HMRC would need to be satisfied that the taxpayer would not be unjustly enriched as a result of receiving the repayment. It suggests that businesses may therefore think about keeping records to demonstrate that they would not gain financially from this repayment. The explanatory notes suggest this could be done, for example, by including a commitment in contracts to repay any amounts charged to their customers to cover all or part of the cost of the levy in the event that the taxpayer is repaid the tax. There does not appear to be a tax information and impact note for the measures contained in the clause, although they are referenced in the tax information and impact note for clause 88. That note, however, suggests a £20 million yield to the Government, yet the provisions in the clause suggest that the Government intend to repay any levy payments made as a result of aggregates losing their exemption. So one would expect a neutral outcome for Treasury on first glance.

It would be helpful if the Minister could provide a bit more clarity on the Government’s intentions on backdating levy repayments. Do they intend to repay businesses in full for any additional tax paid as a result of the suspension of certain exemptions? In which case, would the measures contained in clauses 88 and 89 not be broadly revenue neutral, perhaps having a negligible impact, at most, if the additional revenue yielded now is later going to be paid back?

Finally, the language surrounding these provisions in both the explanatory notes and tax information impact note seems very optimistic and somewhat presumptuous in anticipating the Commission in allowing the Government to once again restore these exemptions. In line with my previous queries, will the Minister explain this optimism that the Government will be able to restore all the suspended exemptions provided for in clause 88? Indeed, have they already had an indication from the Commission that this is the likely outcome?

Photo of Nicky Morgan Nicky Morgan Minister for Women, The Financial Secretary to the Treasury

Clause 88, as we have heard, suspends certain exemptions, exclusions and reliefs from the aggregates levy that are the subject of a European Commission investigation. Clause 89 gives the Treasury the power to use a Treasury order to reinstate those same exemptions, exclusions and reliefs from the aggregates levy, should the conclusion of the European Commission state aid investigation allow.

I will give some background to the investigation before coming on to the detail of the clauses. On 7 March 2012 the European General Court annulled a 2002 decision by the Commission not to raise objections to the aggregates levy. Because of that judgment, the Commission carried out a preliminary assessment of the levy to decide whether to raise objections on the grounds that it potentially gave rise to state aid. On 31 July 2013 the Commission notified its decision to open a formal state aid investigation to determine whether some of the exemptions, exclusions and reliefs falling within the provisions of the clauses amount to state aid and, if so, whether they are allowable state aid.

The changes introduced by clause 88 make 24 different kinds of mineral—together with spoil, waste and other by-products from their extraction—taxable. In addition, material that is more than half, but not exclusively, the spoil, waste or other by-product of an industrial combustion process or the smelting or refining of metal is also made taxable. To reflect the Commission’s doubts about whether slate, shale, coal, lignite, clay and certain specified industrial minerals such as fluorspar and potash are ever used as aggregates, these materials become chargeable with levy only when they are commercially exploited for construction purposes. The use of clay or shale in the manufacture of ceramic construction products such as bricks and roof tiles, and the use of gypsum or anhydrite in the production of plaster, plasterboard or related products have never been regarded as aggregate uses and so, to ensure these uses continue not to be taxed, they become exempt processes. All these changes take effect from 1 April 2014. Clause 89 enables the Government to reinstate any or all of the suspended elements of the levy if, in concluding its investigation, the Commission decides that these elements are not state aid, or are allowable state aid.

On the expectation that the Commission will conclude its investigation during 2014-15 and find that none of the exemptions, exclusions or reliefs amount to state aid, the changes are forecast to result in a revenue yield of £20 million during this year only. The hon. Member for Newcastle upon Tyne North asked how the £20 million was calculated. A variety of data sources were used to establish the tax base for the measure, including mineral product association data derived from WRAP research carried out for the Department for Communities and Local Government, the Department for Business,  Innovation and Skills monthly bulletin and the annual minerals raised inquiry, also known as Business Monitor PA1007, published by the Office for National Statistics. Those data were used to estimate that around 7 million tonnes of aggregate would be brought into taxation through the suspension of the exemptions. The static costing was calculated by multiplying the tax base by the change from zero to £2 levy payable per tonne. An adjustment was also made to account for material expected to be used by the Environment Agency following the flooding in early 2014. The overall behavioural effect from suspending the exemptions was expected to have a negligible effect on the yield, and the yield was assumed to be zero in future years as we expect to reintroduce the exemptions in 2015-16. The Commission has indicated that it aims to conclude the investigation this autumn. In relation to the optimism, the Government have always maintained that none of the exemptions, exclusions and reliefs being investigated are state aid. We are very clear about that. My officials have been providing evidence to the Commission to support that view as part of a formal investigation process, and I sincerely hope the Commission will agree with our position.

The changes are expected to directly affect around 200 businesses, which will incur some additional costs associated with registering, record-keeping and accounting for the tax. How did we arrive at 200 businesses? The British Geological Survey’s directory of mines and quarries provides details of mine and quarry operators, their sites and the minerals they extract. It was possible to estimate the number of businesses affected by the suspension from the details in the directory of operators dealing in the materials affected.

Those businesses may incur a significant financial burden if they are unable to pass on the cost of the levy fully to their customers. Businesses that commercially exploit slate for use as aggregate or commercially exploit the waste arising from ball clay and china clay are likely to be most affected by the suspensions. However, aggregate sales are ancillary for such businesses, so the burden should not be excessive.

Clause 89 provides for the suspended elements of the levy to be restored retrospectively if the Commission decision allows. HMRC will therefore be able to repay the tax paid as a result of the suspension, potentially putting effective businesses back in the position that they would have been in had the suspension not taken place. Using a Treasury order for this purpose will ensure that there is no delay in giving effect to the reinstatement, should the timing of the Commission decision not fit with the timetable for a future Finance Bill. As we have heard, the tax information and impact note estimates the cost at £20 million. We will need to wait for the Commission’s decision before we can look at the impacts or exactly how we will make repayments, but the idea will be to get the money back to businesses as quickly as possible.

My officials are co-operating fully with the Commission to expedite the conclusion of the investigation. While it continues, the Government have suspended those elements subject to the investigation only—I emphasise that—because they are obliged to do so under European law and only to the extent that the Commission has expressed doubts about them. Although it is impossible to say whether  any reinstatement of the exemptions will take place, it is important to act now to ensure that tax that is collected only because the Commission investigation obliges us to collect it can be repaid without delay should the conclusion of the investigation allow.

Question put and agreed to.

Clause 88 accordingly ordered to stand part of the Bill.

Clause 89 ordered to stand part of the Bill.