HMRC should use state aid investigation into aggregates tax as "excuse to rewrite legislation", says expert

The European Commission has begun a formal investigation of certain exemptions and reliefs contained in the aggregates levy regime, according to a briefing note from HM Revenue & Customs (HMRC). The investigation follows a complaint by the British Aggregates Association (BAA) that taxing certain activities and materials but relieving others amounted to illegal state aid.

However, tax expert Ian Hyde of Pinsent Masons, the law firm behind Out-Law.com, said that there were more fundamental problems with the regime than its range of exemptions and reliefs.

"It is unclear why the Commission is concentrating on these exemptions in legislation that is badly written and with no discernable logic for many of its charges and exemptions," he said. "It is unlikely that this process, whatever the outcome, will produce a coherent code for aggregates levy. If the UK is to have an aggregates levy, it should at least be rational."

"This announcement will be a real worry for those operators who have until now managed their businesses on the assumption that the specific exemptions will apply. There is a risk of the exemptions being declared as state aid and operators having to pay tax on extractions going back 10 years. However, even if it tried to do so, HMRC would have practical and legal hurdles to overcome," he said.

Hyde said that companies that dealt with aggregates should consider "putting in contingency plans against having to pay for the tax", should the Commission find that the reliefs were illegal. For example, they should look at supply contracts to see which party would be responsible for any unpaid tax and whether adjustments to those contracts were now possible or were time barred, he said. Companies will also be able to respond to the Commission directly once it publishes details of its investigation.

State aid is an advantage or incentive granted by a national or local government to certain commercial companies to the disadvantage of others, and can take a variety of forms. To ensure fair competition across the EU, state aid is generally prohibited unless it can be justified for general economic development reasons.

Member states must apply to the Commission for clearance on a case by case basis before they can offer funding or incentives which amount to state aid, although some types of aid are automatically exempted under the General Block Exemption Regulation. Member states can be required to recover illegal aid from companies which have received public support in breach of the state aid rules.

The aggregates levy was introduced in April 2002 and is payable when rock, gravel, sand and whatever occurs or is mixed with it is commercially exploited. It is payable at a basic rate of £2 per tonne. The tax was introduced to encourage recycling of these materials rather than further extraction. Certain materials are exempt from the levy including coal, lignite, shale and slate; clay, soil and organic matter; and certain industrial minerals specified in the legislation.

In April 2002, the BAA made a submission to the Commission arguing that the aggregates levy contained state aid. However, the Commission decided not to raise any objections against the levy. The challenge was referred to the European General Court, which annulled the Commission's decision not to object in March last year. According to HMRC, this was not because the Commission's conclusions were wrong but because it had not properly considered the question.

In its briefing note, HMRC said that the Commission had already made it clear that the aggregates levy itself as well as some of the exemptions and reliefs were not state aid. However, it is formally reassessing the exemptions and reliefs for certain specified materials. HMRC said that companies subject to the levy must continue to pay it until the Commission completed its investigation.

"Businesses registered for the aggregates levy and commercially exploiting aggregate in the UK have a continuing legal obligation to pay the levy due on their activities," the briefing note said. "The opening of the Commission investigation does not affect that position."

"HMRC has a legal responsibility to collect the levy, including from those unwilling to pay, and will act to recover any levy that is withheld. Those who fail to comply with their legal obligations to declare and/or pay the levy when it is due may incur penalties and interest," it said.

The Commission has not asked the UK to suspend the existing exemptions and reliefs during its investigation, HMRC said.