Aggregates levy review should address 'patchy' exemptions

Steven Porter, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com, was commenting as the government launched a review of aggregates levy, coinciding with the Chancellor's Spring Statement.

The review will look at the objectives and the impact of the levy; how effective the current design of the levy is; and the environmental and business context of the production and supply of all kinds of aggregate and the extraction of other construction materials. It will also consider potential reforms to the levy.

Aggregates levy is a UK tax on the commercial exploitation of rock, sand and gravel. It is charged at a flat rate of £2 for every tonne of rock, sand or gravel extracted. It was introduced in 2002 as an environmental tax to encourage the recycling of aggregate. However, in addition to applying to the quarrying industry, it often applies when aggregate is extracted in the course of an infrastructure project.

There are exemptions for some materials. In April 2002, the British Aggregates Association (BAA) challenged these exemptions, claiming that excluding some materials but not others from the tax was illegal state aid. State aid refers to advantages or incentives granted to certain commercial companies by national or local governments to the disadvantage of others.

Although the Commission originally decided not to raise any objections to the levy, this decision was annulled by the European General court in March 2013. The Commission found the levy exemptions to be lawful, apart from the exemption for shale used in construction, which constituted an unlawful aid. As a result, the government removed the exemption for shale in 2015 and was obliged to pursue the collection of historical aid.

There are also a limited number of exemptions for particular activities, for example for when aggregate is extracted as a by-product of the construction or repair of a proposed highway or railway.

"Aggregates levy has some narrowly drawn exemptions which can apply on some infrastructure projects, but there are traps for the unwary," Steven Porter said.

Last year, the Upper Tribunal decided that work to create a new marina was not 'dredging' the bed of a 'watercourse' and the marina was not a 'channel in or approach to a port or harbour' and so the aggregate extracted was not exempt from aggregates levy.

"Past proposals to make the exemptions wider have met with resistance from the quarrying industry. For example in 2017 the government decided not to proceed with a proposal to expand the exemption for aggregate extracted when laying underground utility pipes  because responses to the consultation were divided," Porter said.

The exemption for utility pipes only applies to aggregate extracted from under a street or road. If the pipe goes across other land the aggregate extracted there is not exempted causing difficulties for water companies and other utility providers. 

One of the questions to be addressed by the review is whether the legislation's current approach of being widely drafted and then having 28 exemptions is appropriate. As the Office of Tax Simplification asked in its review of the levy; "should the tax be based on defining what is caught rather than what is excluded?"

The levy has been identified as appropriate to be devolved to the Scottish Parliament and the Welsh Assembly. A question to be addressed by the review is the suitability of the current design of the tax for devolution.

The government says it "will engage widely with stakeholders" throughout the review and a working group of industry representatives has been formed. Written representations can be made by 5 July 2019. The government aims to report back and announce any next steps from the review by the end of the year.