Supplementary memorandum submitted by
the British Aggregates Association
I refer to your recent correspondence and our
subsequent telephone conversations on the aggregates levy and
in particular the forthcoming meeting of The Committee to be held
at Storemont on 16 September 2003.
You have asked for papers outlining the British
Aggregates Association's legal challenge against the levy in order
that you can brief Members prior to the meeting on 16 September.
To this end I have enclosed four short papers
which I trust will help to acquaint Members with the position
as we see it. These papers are:
— A brief background to the BAA legal
challenge.
— Facts and anomalies surrounding the
levy that have arisen in the first year of implementation.
— An internal e-mail outlining the
key issues of the Construction Products Association to the DTL,
concerning the aggregates levy, including factors concerning Northern
Ireland.
— A BAA paper entitled—Aggregates
Levy: A Good Tax or Bad Tax?
BACKGROUND TO THE BAA'S LEGAL CASE AGAINST
THE AGGREGATES LEVY
When the Government first proposed the introduction
of a tax on aggregates, both trade associations, The Quarry Products
Association and The British Aggregates Association voiced their
opposition.
The Government stated that the reasons for the
imposition this new tax was on environmental grounds and to sustain
what is a natural asset. No evidence to suggest that there was
an environmental problem from quarries or that there was likely
to be a shortfall in reserves of natural aggregates in the foreseeable
future was put forward to justify these claims.
The Government (Treasury) instigated what is
seen in the trade as a spurious consultation process by an organisation
known as London Economics who have subsequently been wound up.
London Economics set out to justify the imposition of a tax by
foul or fair means. At one stage they tried to justify the costs
of a tax by quoting a monetary figure that people would pay to
get quarries moved away from their area, if in fact there was
quarry there in the first place.
Despite a lack of any substantial evidence gained
from this consultation and the objections and concerns raised
by the industry, the Government refused to have a new consultation
carried out saying that they had already spent £600,000 on
the consultation and that was it!
The QPA subsequently proposed a policy whereby
those quarries that adopted a stnngent environmental audit should
be allowed to trade without the imposition of the levy. The BAA
strongly objected to this on the basis that it was unfiiir to
smaller enterprises who did not have the staff or means to carry
out, or meet these so called environmental audits.
The Government accepted the BAA's point of view
that this was unfair to SME's and this so-called "green quarries"
idea was dropped.
(Note: The idea of an environmental audit
for Northern Ireland quarries has, been put forward by QPANI as
a basis for a reduced levy for Northern Ireland Quarries and in
order for that reduced levy to comply with EU rules.)
At the onset of the Aggregate Tax the BAA legally
challenged the imposition of this tax on the grounds that it had
been imposed selectively and not fairly across the board.
The Government stated that the tax was a tax
on "virgin aggregates". (We assume they mean the extraction
of rock out of the ground). However, china clay, slate and shale
are not taxable although almost 3 million tonnes per year of china
clay aggregates for construction purposes are put on the market.
According to their website McAlpine Slate in north Wales produce
more than 600,000 tonnes per year of construction aggregates from
slate. Both these operations are having a severe effect on the
businesses of normal aggregate quarries in those areas where this
takes place. (Note: In Northern Ireland the aggregate quarries
there have the same problem with shale aggregate that is also
not subject to tax.)
The Government stated that the tax is an environmental
tax, a tax on so called holes in the ground. However, china clay
pits, slate quarries, cement quarries, opencast coal sites and
pits for clay are all holes in the ground, but their products
(whether used as construction aggregates or not) are not liable
for the levy. Furthermore, it should be pointed out that for every
3 million tonnes of china clay produced every year, 24 million
tonnes of material is put to waste. For every 3 tonnes of roofing
slate manufactured, approximately 90 tonnes is put to waste.
The Government says it is a tax on use. However,
slate aggregates, slag aggregates and sand from china clay have
all been used as aggregates for construction purposes for over
40 years, yet these particular materials are not taxed??
The Government says the tax is to encourage
more use of recycled materials such as demolition, waste (broken
concrete and brick known as CD waste). There is no evidence to
suggest that there is a problem with marketing recycled aggregates.
In London and Manchester there is a thriving business in recycled
demolition materials. It needs no financial support, as there
are simply no quarries in the city centres. Crushing broken concrete
will always cheaper than winning virgin rock and turning it into
construction aggregates. The problem with CD waste is simply the
supply of materials from demolition sites. It is linked to how
many buildings get knocked down. In rural areas such as Northern
Ireland, one must conclude that the supply of demolition waste
is severely limited, therefore, the supply of raw materials for
construction in Northern Ireland has to depend on the quarries
that supply construction aggregates.
With all this talk of environmental constraints
on aggregate quarries and this being the reason for the tax, the
following should be pointed out. As a direct result of "unfair
competition" from untaxed or exempt aggregates, a major environmental
problem is being created across the country. Because many quarries
cannot now market their "secondary products" such as
quarry scalpings or crushed fines; million of tonnes of these
materials are being stockpiled in quarries throughout the land
and this could lead to blots on the landscape, where before there
were no blots, or even likely to be any blots.
The instigators of the aggregates tax failed
to realise that if you produce quality aggregates such as 20 millimetre
aggregates for concrete, or 60 millimetre aggregates for rail
ballast, then the quarry processing/crushing system will inevitably
produce crushed fines or scalpings (known as secondary aggregates)
as a result of producing the so called quality "primary aggregates".
In the past, these "secondary aggregates" could be sold
off cheaper and there was no problem with so called "waste
materials". There simply was no waste, everything got sold.
Now, with the addition of £1.60 of aggregate
tax, these materials cannot get sold and so a new "waste"
problem is starting to emerge.
The above points are the basis of the legal BAA's
legal challenge against the imposition of the aggregate tax
The initial case was heard in the High Court
early in 2002. The BAA main complaint was that those exempt materials,
as outlined above, amounted to illegal State Aid and asked that
the UK Government (HMG) be ordered to apply to the EU Competition
Directorate for State Aid Approval.
Although the BAA was not successful in the High
Court. it was clear that this had been a difficult decision for
the judge, that it was far from clear-cut and that he had either
not read or had not understcod our main submission. He gave us
leave to appeal, which was in itself quite unusual and HMG did
not seek to oppose our application to lodge an appeal. The case
is now waiting to be heard in the Court of First Instance in Brussels
and we anticipate that this will be in the early part of next
year.
THE AGGREGATE TAX—SOME FACTS AND ANOMALIES
THAT HAVE ARISEN IN THE LAST YEAR OF IMPLEMENTATION
An aggregate quarry in Cornwall has shale beds
that amount to 40% of the rock content. The shale portion of production
is sold without the aggregate levy of £1.60 simply because
shale is an exempt material, whilst production of the other rock
types carries the levy.
It could be argued that shale is exempt because
normally shale is a waste material arising from the processing
of other minerals. For example the shale spoil heaps of central
Scotland that arose after the processing of oil from the shale
beds many years ago. Tlus exemption was never meant to apply to
aggregate quarries.
The result of this anomaly is a threat to jobs
at nearby quarries where the tax applies to all aggregates sold.
Furthermore, this leads to the creation of waste heaps at other
quarries who cannot sell secondary products, or quarry scalpings,
because of unfair competition from the so called shale aggregates.
Another anomaly concerning shale is as follows.
Clay or soil, which overlies an igneous rock extrusion, is altered
by the heat of molten magma at the time of the volcanic action.
The soil is "cooked" hard and is known as shale. Many
igneous rock quarries are overlain by a metre or two of shale.
This is a particularly common occurrence in igneous quarries of
Northern Ireland. It is normal to sell this shale overburden very
cheap as a fill material simply to remove it from the quarry face.
Since the advent of the aggregates levy, quarries with shale overburden
have been able to sell this material easily because as shale,
it is not subject to the levy. However, those quarries whose overburden
or quarry waste cannot be termed shale cannot sell it because
it is subject to the levy. The result is a growth of waste heaps
at quarries throughout the land as a direct result of the aggregates
levy.
Northern Ireland quarries are also suffering
because of the large volume of aggregates being brought in from
south of the border which have not had the tax paid simply because
the problem is too big to police effectively. Then there are the
farmers who are selling untaxed material on the pretence that
the excavations are part of a "farm restitution programme".
There is the threat that the tax is about to cause more unemployment
by forcing concrete and blacktop producers to relocate south of
the border. This means that value added products can be brought
back into Northern Ireland and not be subject to the levy, even
though the aggregate ingredients were quarried in the north in
the first place. This creates another environmental anomaly in
that more lorry miles have been created to deliver the product.
Silica Sand from the extraction of china clay
in both Cornwall and Devon is another material that is exempt
from the levy. Like the example above, this too has had an adverse
effect on the Market and the environment. Well over one million
tonnes per annum of this material is being processed for aggregate
purposes in the south west of England. This has meant many more
truck miles by hauling the material greater distances simply because
the material has a massive sales price advantage by being exempt
from the levy as well as having minimal production costs because
it is a result of china clay production and not the usual extraction
costs. Like the shale above, a waste problem in the form of heaps
of unsold crushed dust and quarry scalpings is starting to emerge
in the Southwest.
In west Wales some operators have opened up
so called slate quarries to supply the construction market with
cheap fill or road bases.
Like shale and sand from china clay, slate is
exempt from the aggregate tax. However, this exemption was meant
to apply to the roofing slate quarries of north Wales. By actually
naming slate as an exempt material means that any operator can
sell slate rock at an unThir advantage over regular aggregate
quarries and thus create another waste problem and more lorry
miles onto the roads. The fact that this kind of slate has no
connection with roofing slate is not brought into question.
The aggregate tax does not apply to dimension
stone as such, but it does apply to the cut offs from dimension
stone production. However, it does not apply to those cut offs
from SLATE production. In north Wales there is an example of a
quarry that has tens of thousands of tonnes of cut offs of GRANITE
in a waste heap that was formed over 100 years ago from the hand
processing of stone (before the days of electricity in quarries).
The quarry cannot sell this material because it is uncompetitive
against the local slate cut offs even though the granite material
is nearer to the market. Slate is exempt from the levy but granite
is not.
Until recently it appeared that ground limestone
for animal feed stuff was only exempt from the levy if it was
used for agricultural purposes such as cattle feed or chicken
grit. If the limestone was an ingredient of pet food or food for
race horses, then it was not exempt. It would seem that the authorities
have relaxed this interpretation by adopting the principle that
if the material is not for "aggregate purposes" (ie
construction aggregate or as bulk in construction aggregates).
This more common sense approach is welcomed, however, it does
beg the question that if exempt materials, eg slate and sand from
china clay, are used strictly for aggregate purposes, then should
they not pay the levy in line with similar aggregates who simply
have a different geological name but have the same end use?
Another anomaly has to be the exemption of cement
from the aggregate tax. This material is largely quarried from
limestone and it ends up with aggregates to be used in construction.
Cement is quarried from limestone rock but it is not taxed.
More and more complaints are being aired about
the poor state of maintenance of our roads. By increasing the
cost of a tonne of aggregates by £1.60, then the cost of
road maintenance has increased. No doubt this has to be a factor
for the reasons for the lack of repairs. How many major construction
jobs have been postponed indefinitely because of increased cost
brought about by the aggregates tax. Peterhead Harbour breakwater
scheme is one. It is rumoured that it may never go ahead now.
Then there are sea defence schemes in East Anglia that have been
put on temporary hold. The armour stone for this work is mainly
imported from Norway but it is still subject to the tax.
15 May 2003
E-MAIL CORRESPONDENCE BETWEEN PETER HUXTABLE
AND BOB DURWARD
We spoke on Thursday about this when you asked
for an update on the key issues from the industry in order to
inform your own Budget Briefing.
I have spoken to both OPA and BAA. QPA are updating
their briefing in advance of their own budget submission, but
are clear about the key issues and I have incorporated these below.
Similarly, BAA do not have a summary of their position, but on
11 July they did publish the results of a survey of their members
which compared company experience during the first 12 months of
the levy against the same period in 2001-02. A copy of their survey
results is attached.
As you said on the telephone, there are two
clear issues that the industry is pressing for.
(i) No increase in the rate of the levy.
This was not a tax introduced in order to raise money for the
Exchequer, but rather to try to change behaviour in a more environmentally-friendly
way. The only justification for any increase would be if it was
believed that a higher rate of tax would help meet whatever environmental
objectives the government has set (which the industry would strongly
dispute—see below). There is therefore no justification
for raising the tax in order to try to help in addressing government
budget shortfalls.
(ii) There is an urgent need to review the
tax and assess whether it is meeting its environmental objectives.
One of the problems with this is that the environmental objectives
are pretty vague (which industry has regularly criticised in the
past), but this should not stop government reviewing this. Indeed,
we understand from both Sir Robert Culpin (Managing Director of
the Tax side of the Treasury) when he came to our Trade Association
President's meeting in October last year, and Martin O'Neill (Chairman
of the Trade and Industry Select Committee) that this was something
the government would do on all tax measures such as this. In addition
to assessing whether the tax is meeting its environmental objectives,
the Review would need to address some of the serious adverse impacts
of the tax, including;
— The build up of waste from quarries
which previously could used beneficially because of its low/nil
value, but which now has to be taxed, removing any prospect of
it being commercially viable to use much of this. There is undoubtedly
an adverse environmental impact here. Perversely, other low grade
waste which is not being taxed is being used as an alternative,
but any environmental benefit from this is more than offset by
the distance that this waste is being transported across the country
eg china clay waste from Cornwall.
— The Northern Ireland problem, with
product moving across the border from the Republic, major enforcement
problems, and a situation that can only get worse as the current
temporary concessions wind down. Does Government think that this
is consistent with its own "sustainability" agenda?
— Increased distortion of the market
in favour of imported concrete products that contain untaxed imported
aggregate which gives an unfair advantage to our near European
neighbours. I understand the concrete industry if facing increasing
imports of this kind of product into the south east of England.
— Cash flow problems, particularly
for smaller operators. In some ways this is a problem of industry
payment mechanisms, but it would be wrong of Government not to
acknowledge the added burden that this tax is placing on small
businesses at a time when they are introducing a whole range of
other initiatives to encourage them to be more competitive.
It would be wrong not to acknowledge that some
substitution of virgin aggregates by recycled product has taken
place as a result of the tax, but the level of recycling in the
industry was already mature before the tax was introduced and
the there has only been a small incremental change in behaviour
which may well have happened anyway irrespective of the tax. What
this review therefore needs to do is to establish whether there
is evidence that the tax has net environmental benefits that justify
the cost to industry, in both tax raised and the administrative
burden it imposes on businesses of all sizes.
You mentioned that you may well have to present
your arguments on this and other budget issues to the Dli Tax
Group on 10 September. Both QPA and BAA would be more than happy
to meet you shortly before that to answer any points you may have
on this, and to add supporting evidence to the points above if
you felt this would be helpful. In the meantime, if there is anything
further you would like at this stage, please let me know.
Michael G Ankers
Chief Executive
Construction Products Association
AGGREGATES LEVY: A GOOD TAX OR A BAD TAX?
Ever since the idea of a tax on aggregates was
first put forward by New Labour in 1997, the concept has come
in for a great deal of criticism. The quarry industry pointed
out that it was already subject to the strictest environmental
legislation in Europe, few complaints were received about quarries
and in any event, the scheme provided no incentive for further
environmental improvement. It was also pointed out that the UK
led the way, in Europe, on recycling. There was no significant
problem with the quarry industry it was a perceived problem as
a result of lobbying by green pressure groups such as the Council
for the Preservation of Rural England and Friends of the Earth.
However, Government was not to be dissuaded and the Aggregates
Levy came into force, 1 April 2002.
GOVERNMENT USED
A GREAT
DEAL OF
RHETORIC TO
JUSTIFY ITS
ACTIONS
"Environmental taxation is not simply an
excuse for raising revenue. How and what a government taxes ends
a clear signal about the economic activities which it wants to
encourage or discourage, and the values it wishes to entrench
in society. Over time the Government aim is to shift the burden
of tax from `goods' such as labour and capital to `bads' such
as pollution But, in line with the Government's Statement of Intent
on Environmental Taxation, published in July 1997, any environmental
taxes should meet the tests of good taxation."
THE 1997 TREASURY
STATEMENT ON
ENVIRONMENTAL TAXATION:
"Environmental taxation must meet the general
tests of good taxation. It must be well designed, to meet objectives
without undesirable side-effects; it must keep deadweight compliance
costs to a minimum; distributional impact must be acceptable,
and care must be had to implications for international competitiveness."
These conditions are clearly sensible yet the
levy has generated a great deal of criticism:
— Widespread and detailed criticism
from the quarry and construction industry.
— Criticism from the Environmental
Audit Committee about the absence of any sort of recognition of
or stimulus for environmental improvement.
— Numerous criticisms from the Northern
Ireland Affairs Committee, most of which were equally relevant
to the mainland.
— Calls for a delay and a rethink by
two Labour Ministers and the CEI.
— Several parliamentary motions and
a large number of parliamentary questions.
— The official opposition praying against
the regulations.
— A three day High Court Judicial Review,
also critical.
— Complaints to the EU Competition
Directorate.
With very few people, apart from the Green pressure
groups and Treasury, continuing to defend this levy, we consider
whether or not Government is adhering to its stated policy.
"Environmental taxation must be well designed,"
The aggregates levy has defeated the best minds
of Treasury and industry alike with its inability to be refined
and has become an enormously complex piece of legislation.
"Able to meet objectives"
Government claims that, "noise, dust and
visual intrusion are costs of quarrying, not accounted for by
existing taxation, and that the levy will reduce the amount of
virgin aggregate used and increase the use of recycled aggregate."
However, UK quarries comply with the strictest legislation in
Europe, few complaints are received, demand for virgin aggregate
is determined by other factors, little if any increase in recycling
has occurred and the levy provides no stimulus for environmental
improvement.
"Avoid undesirable side-effects"
The levy stifles competition, has a disproportionate
effect on SME's, is already creating new waste tips within quarries,
will drive up imports, stimulate marine dredging, cause material
to be transported further, precipitate job losses in the rural
economy, drain funds from overdue road building and repairs and
trigger increases in council taxes and business rates with the
public sector accounting for almost 40% of all aggregates used.
"Must keep deadweight compliance costs to
a minimum"
Compliance costs high due to mind numbing complexity,
the need to apply differential amounts of levy to different products,
cash flow problems and the failure of Section 43 of the 2001 Finance
Act to provide fiscal protection for contracts or relief for bad
debts relating to added value products such as concrete and asphalt.
(50% of all sales)
"Distributional impact must be acceptable"
The £1.60 levy represents a 30% increase
in the regions and a 12% increase in the South East. The "per
capita" use of aggregate is higher in the regions (6 tonnes
England v 12 tonnes NI ) but the reduction in NIC gives greater
benefit to more prosperous, industrialised areas. This is further
exacerbated by the Sustainability Fund which derives revenue from
tonnage, hitting the regions harder, but distributes revenue using
the Barnett formula, based on population.
"Care must be had to implications for international
competitiveness"
Levy will severely damage our international
competitiveness:
— Importers will only bring in saleable
sizes with overseas producers able to dispose of by-products,
tax free, within existing markets.
— Levy is not charged on imported finished
products made with aggregates.
— Levy is not relieved on exported
finished products made with aggregates.
— The UK levy at £1.60 is four
times higher than the most expensive EU country, Denmark at 36p.
Most EU countries have no levy at all and in France it is only
6p.
— Due to the high cost of fuel, restrictive
driver hours regulations and the increasingly congested nature
of our roads, it is often now cheaper to ship aggregates in bulk
from countries like Norway than to deliver by road from our own
rural quarries.
CONCLUSION
The levy fails to meet Government's given tests
for a "good" tax. Therefore, the accusation that it
is a stealth tax has merit. The budget increase in employers MC
rate of 1% (10 times higher than the 0.1% refund claimed to be
a result of the levy) and only 9% of revenue going to the Sustainability
Fund supports this view. It is difficult to avoid the conclusion
that the Aggregates Levy is not just a bad tax, it is a profoundly
bad tax.
May 2002
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