Examination of Witnesses (Questions 1-19)|
MP AND MR
WEDNESDAY 20 MARCH 2002
1. Thank you, Minister, for coming before us
again. We thank you and your officials for your co-operation.
I should like to make an opening statement. As I think many of
those in the room will know, one of the witnesses to our inquiry,
the British Aggregates Association, has mounted a challenge to
the aggregates levy in the High Court. I understand that the hearing
is due to commence in the High Court next Monday, 25 March. As
a consequence, certain aspects of the implementation of the levy
must be considered sub judice. While the discussion of
questions awaiting adjudication in the civil courts is a matter
for the discretion of the Chair under the sub judice resolution
of the House of 15 November 2001, I am sure that neither the Minister
nor any of my colleagues here would wish to prejudice proceedings
in the court next week. The BAA has kindly provided us with a
summary of the arguments it is presenting to the court. From this
document, I understand that the main points of debate for next
week's hearing are, firstly, whether the imposition in the UK
of a tax on imports and exports of aggregates effectively infringes
European competition law by impeding the free circulation of products
between Member States; and, secondly, whether those UK producers
and materials exporters, the slate, china and ball clay industries,
and producers of other untaxed minerals and industrial wastes
that have been exempted from the levy under the Finance Act, 2001,
have effectively been given unlawful state aid through exemption
from the tax. A further challenge is mounted under the European
Convention of Human Rights, Articles 1 and 14, namely the rights
to enjoyment of property and freedom from discrimination. I would
therefore ask my colleagues to avoid these subjects in their questions,
and the Minister will, I have no doubt, avoid them in his answers.
Mr Boateng, have you managed to secure a derogation for the processed
aggregates industry in Northern Ireland?
(Mr Boateng) Mr Mates, can I from the
outset thank the Committee for the contribution it has made, through
its report and through the correspondence we have had, to the
development of our thinking in this area; it has enabled us to
make the announcement that we did in the pre-budget report as
to our intention to phase in the levy for aggregate used in processed
products in Northern Ireland, subject to EU state aid approval.
I am glad to be able to share with the Committee our confidence
that that approval will in fact be forthcoming. A great deal of
work has gone into our preparations and our negotiations with
the Commission, and I am satisfied that we will get the necessary
approval. I am also able to confirm to the Committee today that
the aggregates levy will come in to force on 1 April, as we have
consistently stated. That is the date which the industry has been
working to, and that was the date that we gave in the announcement
of the levy in the Budget 2000. It would be our intention to ensure,
given our confidence that the measure will be approvedbut
it is unlikely to be before 1 Aprilthat that first-year
exemption for aggregates used in processed products in Northern
Ireland would be backdated to the introduction of the levy on
1 April. That will be welcome news to the industry and, I suspect,
to the Committee.
2. What you said will be subject to the resolutions
of the judicial review.
(Mr Boateng) Quite so, but I have a similar confidence
in relation to our case in the High Court at this time.
3. Do you think you will get this derogation
by 1 April?
(Mr Boateng) Not by 1 April.
4. Have you any idea when?
(Mr Boateng) We very much hope by the end of it, and
we intend to backdate it to 1 April.
5. By which time you will not have collected
(Mr Boateng) Quite so; that is the point. The impact
on the industry will be negligible because they will have the
confidence and security of knowing that it is our intention to
backdate to 1 April, and that, aided by the regulations which
we will have published by then, will assist them in their planning.
6. Have you been able to make an assessment
of what difference in real terms the phasing-in will make to the
aggregates and processed products industries in Northern Ireland?
(Mr Boateng) It is a response to the concerns of the
industry. It will enable them to seek alternatives and give them
a breathing space within which to do that. Certainly, the response
that we have had from the industry has been supportive of that
approach; but I am happy to ask Andrew Field, who, as you know,
is Head of Environment Tax Branch and who has given evidence before
the Committee before, to supplement any points that I make.
(Mr Field) The intention of the phasing-in of the
levy for aggregate use in processed products is to allow the sector
to adapt to the introduction of the levy and to take advantage
of opportunities to use waste or recycled construction materials
as alternatives to virgin aggregate in processed products, and
to increase the capacity to do that over the five-year period
of phasing-in that the Government has proposed.
7. Welcome to our Committee. The big problem
we have to face is the fact that there is a land border with the
Irish Republic for those in the industry in Northern Ireland.
We find that because of the land border with the Republic, the
implementation of the levy is likely to divert rather than transform
demand in Northern Ireland. Are you satisfied that your current
plans will prevent this from happening in the short and long term?
(Mr Boateng) We have looked closely at this issue
and listened to the representations made. We think that the phasing-in
of the levy in this way will give the sector time to adjust to
the introduction of the levy. It is an opportunity, as Mr Field
has said, to use more environmentally-friendly inputs. We appreciate
and well understand the impact of the particular land border issue
that you have identified, but do not think that the phasing of
the levy in the way that we propose, and the benefit that derives
from that, will be substantially hindered by that fact.
8. Whilst phasing-in might encourage increased
use of recycling materials, how likely is it that users from Northern
Ireland will do this ultimately? Processed aggregates from the
Republic of Ireland will still be cheaper.
(Mr Boateng) They have a fiscal incentive here to
use recycled goods in the way that we have described. They will
have the certainty in terms of their pricing and sourcing that
the phased approach gives them. We also anticipate that the environmental
concerns that we have in terms of the damage to the environment
in Northern Ireland from this particular process, and the importance
of internalising the externalities and the costs of that damage
will also apply south of the border. There does not suddenly cease
to be a concern about the environment in this particular respect
when one crosses over into the Republic. In the medium and long
term, one would expect the Republic to be recognising the importance
of the approach that we are taking in terms of internalising the
externalities because that is the approach that is being developed
and taken across a range of environmental issues across the European
Union; so any short-term advantage, in my view, is likely to be
9. That is very much dependent on the Irish
Republic following suit and taking the same measures as you have.
(Mr Boateng) One always hopes that environmental good
practice is something that will be emulated by one's partners
and competitors. We certainly believe, Mr Mates, that the United
Kingdom has a good story to tell in terms of its policy and fiscal
responses to environmental challenges. Certainly, when one talks
to environmental NGOs, many of whom have links with sister and
brother organisations in other parts of the Union, they are urging
those other parts of the Union to follow our lead in many areas.
10. We are obliged to you for your answers,
but it is not exactly an answer to the question that Mr Beggs
was asking, and if you will pardon the phrase, there is a certain
schizophrenia about this, is there not? You have acknowledged
that the border is special; you have acknowledged that you need
to take measures to relieve the special pain that would accrue
to Northern Ireland producers of aggregates in the adjustment
to your original plans; but in fact you have merely postponed
that pain. There will come a point during this five-year period
when all of the arguments that were presented, which had caused
you to introduce the gradual increase, will no longer take effect
because it will be economically cheaper to import it, with all
the environmental disadvantages you have agreed there would be.
Therefore, it is pain postponed, not pain avoided, in relation
to the particular pain in Northern Ireland.
(Mr Field) The difference is that instead of a levy
coming in with a full hit in the first year of the levy's introduction,
the levy will be phased in over a period of five years. During
that time, the industry will have a much greater opportunity to
adapt and to take advantage of alternative sources of material
to virgin aggregate for the manufacture of these products. In
the longer term, they will be faced with the full cost of the
levy, and they will need to respond accordingly. That is the intention
of the levy.
11. The point I am making, to which I do not
think we have yet had a concrete answer, is that while you have
acknowledged that there is discrimination and a special situation
because of the border, there will come a timelet us say,
for the sake of argument, in year threewhen it becomes
more economic to import from the Republic, from those who are
not paying this levy, unless they have moved in this two-year
periodbut the European wheels grind even slower than ours,
I think it would be agreedand Northern Ireland will be
in the same position as if you had introduced the levy all at
once, albeit it is acknowledged and welcomed and there is a couple
of years' relief; but it is only deferred pain.
(Mr Boateng) It depends how you define pain. We would
12. It is the special pain that the Northern
Ireland producers will feel which mainland Britain producers will
(Mr Boateng) There are particular circumstances in
Northern Ireland in relation to the border, but the logic of the
position that you are sharing with us, Mr Mates, if we were to
accept it, would be to exempt Northern Ireland completely. That
is undoubtedly the objective of some, but it is not an objective
that we share. Were one to take that view, there are other areas
of fiscal policy in other industries where there is a fiscal impact
arising from the fact that we have a border with the Republic,
where we would be urged to do the same. Northern Ireland is part
of the United Kingdom, and there is an important principle of
public and fiscal policy that requires Northern Ireland to be
treated in exactly the same way as other parts of the United Kingdom,
unless a sufficient case can be made for the approach,
which we have adopted in relation to this particular tax, of phasing
it in. Where that can be done with benefit, and subject to state
aid, that is something that we are very open to doing; but we
are not about to concede that we should take this approach in
any other areaand you have other interests in relation
to which, no doubt, I will have the pleasure of appearing before
the Committee. It is because of the particular circumstances in
Northern Ireland we should take a different approach.
13. I almost entirely agree with what you have
just said, but one of the logical conclusions is absent. You said
that the logic is that we should not introduce it at all. There
is another logic: that because of this particular situation, we
should not introduce it until such time as you have made arrangements
with the Republic that it will not be unduly unfair on Northern
Ireland producers, but it will be the same; and therefore the
effect will be the same throughout the United Kingdom.
(Mr Boateng) That, too, could amount, in the eyes
of the uncharitable, to an indefinite postponement, because it
might be many years before they were so persuaded.
14. You were saying earlier that you hoped they
would follow your good practice quickly.
(Mr Boateng) I do hope, but I would be reluctant to
base our fiscal policy upon that hope.
Chairman: That is why we are reluctant to accept
the pain for Northern Ireland upon that.
15. There is another possibility in regard to
this matter; if there is no change in the regime so far as the
Irish Republic is concerned, some assessment should be made as
to which point, at year three or whatever, the problem we are
presenting kicks in. In that way it would be possible to move
partially along the road towards a full aggregate tax, but not
then engage in the later stages until that agreement had been
entered into with the Irish Republic.
(Mr Boateng) Mr Barnes, I think that that is a very
interesting and helpful proposition. Our proposal is that the
levy should have a zero rate for processed products in the first
year, and the rate should then rise at 20 per cent increments
over the next five years to the full rate. It would certainly
be important to take into account the impact of the levy on the
market and on conditions in Northern Ireland. Undoubtedly, the
position in relation to the Republic, as you have pointed out,
will have a bearing on that.
16. Therefore, the matter needs to be looked
at very carefully.
(Mr Boateng) It does.
17. As the aggregate tax, in stages, moves inwhat
is liable to happen and not just what is happening.
(Mr Boateng) It does, Mr Barnes. I think we have learnt
from the experience around the introduction of the tax and the
research that was carried out there, that there will need to be
Northern Ireland-specific research. I think there is no doubt
18. That is very encouraging, as is, as I understand
it, your undertaking that if you found the levy to be having a
disproportionally severe effect on Northern Ireland, you would
look again at the whole of it.
(Mr Boateng) The Chancellor keeps all taxes under
review. It will be particularly important that his review of this
tax is informed by appropriate research.
19. We are particularly aware that this is a
tiny drop in a very large ocean of the Treasury, and therefore
our keenness is that it should not be overlooked as, to be fair,
it was in research last time. May I ask a technical question?
If you were persuaded, shall we say, in three years' time that
this was having a disproportionate effect, what measures would
you have to take to alleviate it? Would you have to come back
for legislation to stop the remorseless 20 per cent increase?
Could you put it on hold or could you cancel it, without time-consuming
(Mr Field) I suspect the answer is that the annual
20 per cent increment will have to be legislated for each year
so that in each year we will bring forward legislation to do that.
If there was a change in the policy in that respect
1 Note by witness: "I said I suspected
that the annual 20% increment in the rate of levy for processed
product in NI would need to be subject to legislation each year.
It is normally the case that changes in tax rates are included
in the Finance Bill. However, I am now given to understand that
the provisions in this year's Finance Bill are being drafted in
a way which is intended to lead to the 20% increment occurring
automatically. Consequently, contrary to what I said, further
legislation would need to be brought forward to halt the annual
20% increase. If the Government so wished, this could be included
in the relevant Finance Bill." Mr Andrew Field, 22 March