HMRC begins process of clawing back aggregates levy State aid

The exemption in question is for the deliberate extraction of shale aggregate for commercial exploitation.

In the letter HMRC asks the businesses concerned to demonstrate whether they commercially exploited shale aggregate from 1 April 2002 to 31 March 2014 and asks for details of the number of tonnes of relevant aggregate. Businesses are asked to reply by 14 July.

Under EU law the UK government is required to recover unlawful State aid with interest from businesses that benefited from it.

“It will be a shock to aggregates businesses who benefitted from the exemption that HMRC are going to carry out their threat made in 2012 to recover duty from 12 years ago and, further, compound interest is payable" said Ian Hyde a tax expert at Pinsent Masons, the law firm behind Out-law.com.

"There will be difficult issues as to what happens with traders who don’t have the records. Further the 14 July deadline is woefully too short to allow businesses to accurately respond to HMRC" Hyde said

Aggregates levy is a UK tax on the commercial exploitation of rock, sand and gravel. It was introduced as an environmental tax in 2002 to encourage the recycling of aggregate. Aggregates levy is charged at a flat rate of £2 for every tonne of aggregate extracted, and proportionally for any amount under that weight.

In August 2013, the European Commission notified the UK government that it had decided to open a formal investigation into whether certain aggregate levy exemptions were compliant with EU State aid rules. This followed an earlier decision by the Commission not to raise objections to the levy when it was introduced in 2002. The UK suspended all the exemptions under investigation from 1 April 2014.

In March this year the Commission said that it had decided that the shale exemption constituted State aid but that the other exemptions did not. HMRC said it will consult on reinstating the other exemptions with a view to making the reinstatement retrospective to 1 April 2014.

Although the European Commission does not have direct authority over national direct tax systems of EU Member States, it can investigate whether tax incentives breach EU ‘State aid’ law. State aid can occur whenever state resources are used to provide assistance that gives organisations an advantage over others. It can distort competition which is harmful to consumers and companies in the EU and is effectively a breach of EU law.

The exemption that the Commission says constitutes State aid relates to "material wholly or mainly consisting of shale that is deliberately extracted for commercial exploitation as aggregate, including shale occurring as by-product of fresh quarrying of other taxed materials; and  aggregate consisting wholly of the spoil from any process by which shale that is deliberately extracted for commercial exploitation as aggregate has been separated from other rock after being extracted or won with that other rock".

The Commission has ordered the UK to recover the State aid relating to the shale exemption going back 12 years.  Unlawful aid paid more than ten years before the Commission's decision cannot normally be recovered. However, almost any communication about the aid between the member state and the Commission, which need not be known to the beneficiary, restarts the clock.

Caroline Ramsay, a state aid expert at Pinsent Masons said “Given the period of elapsed time and the number of potential aid beneficiaries involved, the exercise of calculating and recovering the unlawful aid is going to be an enormously complicated exercise for HMRC.  The UK does not have a choice, however, with regard to whether or not to recover the aid, it must do so and the European Commission will insist upon a claw-back of the aid.”

"If this is a sign as to where the state aid debate is going there is a real concern as to how businesses can have tax certainty – the days of a four year time limit seem to be disappearing” Ian Hyde said.

The Commission said that no aid needs to be recovered for shale aggregate which was extracted as by-product of untaxed materials such as coal extraction; used in ceramic processes, such as production of bricks and tiles; used in place of clay, slag or other materials as a source of aluminosilicate in the manufacture of cement; or otherwise demonstrably used for other than aggregate purposes.

State aid below a total de minimis limit per single recipient of €200,000 over a 3-year fiscal period, need not be recovered.

"The Commission has offered a limited number of get outs but these may not be practical, for example traders will need to prove use of the aggregate in 2002, at a time when there was no need to retain the evidence as to use" Hyde said.

The letter says that if the requested information is not provided or is insufficient to enable HMRC to assess whether unlawful aid is granted, HMRC "will be compelled to take further action (for example, the commencing of litigation) to obtain the information required and ultimately to recover any aid".

HMRC said it would offer 'Time-To-Pay' arrangements for businesses that face difficulty paying other taxes as a result of the requirement to repay this State aid, allowing them to spread payments over a longer period.