Steven Porter, Alastair Dale and Jon Hart of award winning infrastructure law firm Pinsent Masons LLP highlight the recent review launched by the UK Government on the Aggregates Levy.
Since earliest times, construction aggregate has been a key material for the highways industry. Pit sand and gravel were used by the Romans in many of the roads that crossed their empire, while the current international aggregate industry is worth billions of dollars and includes many household names.
Questions relating to the recycling of aggregates have been seen increasingly as a major environmental concern, for example as highlighted in the European Waste Codes. And as is so often the case, where there is practical benefit and utility or wider social considerations at stake in items, governments will work out how to tax them.
In the UK this takes the form of the Aggregates Levy, a UK tax on the commercial exploitation of rock, sand and gravel.
In simple terms, it is charged at a flat rate of £2 for every tonne of rock, sand or gravel that is extracted. It was introduced in 2002 as an environmental tax to encourage the recycling of aggregate. While the particular focus of the levy is upon the quarrying industry, it often applies when aggregate is extracted in the course of an infrastructure project and therefore is of wider concern for those building (and paying for) such projects.
On the face of it, there is potential for the levy to have a significant effect on the pricing of certain highway projects.
Highways industry exemptions
However, there are a limited number of exemptions for particular activities and the highways industry has benefited from a longstanding exemption from the levy, which applies to some of its activities. The exemption covers circumstances when aggregate is extracted as a by-product of the construction or repair of a highway.
Importantly, the excavation must be carried out for the purposes of constructing the proposed highway and not the collection of the aggregate. This means that material extracted from the line or proposed line of the highway will generally be exempt. Unsurprisingly, there is frequently a difference in opinion between taxpayers and HMRC as to what constitutes the line or proposed line of the highway.
Coinciding with the chancellor’s Spring Statement, the Government launched a review of the levy. In the Government’s words: ‘It has not been reviewed since its introduction, but following the conclusion of long-standing litigation in February this year, the Government announced a comprehensive review of the levy, and confirmed its commitment to devolving the levy to the Scottish Parliament.’
Giving and taking away
One of the crucial 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?’ If this question is given due consideration as a consequence of the review, this could be an indication of possible changes to come.
In some respects, we have been here before. The focus on exemptions has caused issues in the past. 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.
The exemption for utility pipes only applies to aggregate extracted from under a street or road. Therefore, if the pipe goes across other land, the aggregate extracted there is not exempted – potentially causing difficulties for the contractors involved.
Legal challenge
In April 2002, the British Aggregates Association (BAA) challenged the exemptions placed on some materials, claiming that excluding some materials but not others from the tax was ‘illegal state aid’.
In simple terms, state aid refers to advantages or incentives granted to certain commercial companies by national or local governments to the disadvantage of others and/or the distortion of market competition.
Although the European 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 unlawful aid. As a result, the Government removed the exemption for shale in 2015 and was obliged to pursue the collection of historical aid.
Most recently, in a case before the Upper Tribunal (which has equivalent status to the High Court in England or the Court of Session in Scotland) the court interpreted that certain construction work did not fall within the definition of a particular exemption that the subcontractor in that case was seeking to rely on.
The effect of the court’s decision was that the aggregate extracted was not exempt from the levy. This had a devastating effect on the minor subcontractor, who could not then get a repayment from HM Revenue & Customs of over £170,000 of Aggregates Levy paid on the aggregate extracted from the site.
This provides some context for the circumstances in which the present review is taking place. It is intended to 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.
Given the exemption from the levy that the highways industry currently enjoys with regard to some of its activities, the outcome of the review will be of particular importance to those highways contractors and utility companies that currently extract aggregate in the course of carrying out works under the highway. Importantly, will the review give rise to recommendations or changes that could potentially adversely affect the exemption - whether in terms of its scope or potential interpretation?
Material issues
If there are material issues arising, the findings of the review will almost certainly require legislative change and this may take time or even require transitional arrangements.
Even so, this is perhaps a reminder that highways projects do not exist in a vacuum and these kinds of changes may or may not be considered under relevant contractual terms. Now may be a good time for contractors to dust down their contracts and to check the taxation and change in law provisions.
Many standard form contracts will put the risk of changes in taxation firmly on the contractor, unless the parties have agreed otherwise (for example by the inclusion of Option X2 in NEC contracts).
Certain contract pricing schedules in tender processes and contracts will also expressly require bidders and contractors to confirm that they have factored in all material costs, including applicable surcharges, taxes and levies.
It is worth considering how a change in the levy might be dealt with in relation to your own bids and contracts – especially so where highway construction and maintenance comprises part of a wider project programme and the application of current exemptions are already complicated by the kind of work being undertaken.
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. We’ll monitor the feedback with interest.
