Examination of Witnesses (Questions 100-119)
25 FEBRUARY 2004
JOHN HEALEY
MP AND MR
KRIS ROMANSKI
Q100 Chairman: In that case, have you
already made clear to the Commission that if they cannot get their
act together—and I do not mean that pejoratively—by
1 April, you would want the figure frozen for the very sensible
reasons that you and I have just agreed? Is that a fallback position
that you have sought to negotiate with the Commission?
John Healey: To be quite frank,
Chairman, I have not wanted to encourage the Commission to consider
a timescale that might stretch beyond 1 April at the moment, so
our major focus has been on the preparation of the case and in
preparing the factual answers that the Commission now wants to
four or five aspects of the decision they are going to take.
Q101 Chairman: You have not looked into
what the cost would be to the industry and to the Government of
collecting surplus levy and then refunding it?
John Healey: There would clearly
be a degree of cost in complying with that, and that would be
a very undesirable and unnecessary administrative burden. I do
not have a figure, and I have not put a figure on that. This is
at the moment not the area of policy work and analysis that we
have given the most attention to.
Q102 Chairman: What are your options
if the Commission should reject the scheme?
John Healey: In a sense, I think
the more likely areas of discussion if the Commission do not feel
that they can support in entirety the design of the new scheme
are that they might regard certain elements of what we are proposing
as less acceptable and they may not agree those. We have not been
working on a contingency scheme if this were to go down the pan.
We would be left, clearly, with the current relief scheme, that
would remain extant and in operation, so that from 1 April, instead
of the new design of relief scheme that we believe is necessary
for the industry in Northern Ireland, we would be left with the
current one.
Q103 Chairman: You would be left also
with all of the environmental problems which you had not considered
before introducing this in Northern Ireland, and you would be
left with the fact that the environmental improvements you are
seeking have not happened.
John Healey: What we would be
left with would be a relief scheme to try and recognise the particular
circumstances in Northern Ireland which in our judgment, based
on the evidence of the Symonds Report and indeed this Committee,
would not be meeting the environmental aims that we originally
set out for the levy, would not be meeting the environmental aims
as the levy appears to be starting to do in the rest of the UK,
and we would therefore have to re-think how we try to make the
levy operate in the particular circumstances in Northern Ireland
in a way that would not have the economic impact that, because
the levy is in operation, we have been able to assess and that
it has become clear it has, and we would have a system that would
not achieve the environmental gains that we are looking for.
Q104 Reverend Smyth: I understand the
concept of the environmental impact. What assessment have you
made of the impact of the proposed scheme on imports and exports
of virgin aggregates or even processed products? Has any assessment
been made of that?
Mr Romanski: Yes. Implementing
the proposed scheme should help. As far as processed products
go, by keeping the relief at 80%—and I think that is the
judgment both of the industry in Northern Ireland and ourselves—the
20% tax, 32p a tonne differential is not enough to cause serious
problems and serious incentives for imports from the Republic,
or a serious disincentive for exports of processed products from
Northern Ireland to the Republic of Ireland either. Equally, by
reducing the tax and the tax differential on virgin aggregate
used in its raw state, it should help ease the current incentive
that there is to import aggregate from the Republic of Ireland
and illegally not pay tax on it. The assessment is that it would
help with the current problem in Northern Ireland and, on processed
products, prevent it from getting worse, because there is not
a problem currently.
Q105 Reverend Smyth: Exports from Northern
Ireland, as I understand, to the mainland will be liable for the
full levy of £1.60 a tonne. Are exports to the United Kingdom
from other EU Member States to be taxed in any way?
Mr Romanski: Yes. Imports of virgin
aggregate should bear tax when the aggregate is commercially exploited
in the United Kingdom. The aggregate in imported processed products
would not bear tax. Except in the case of the Republic of Ireland
and the Northern Ireland border, there is actually very little
trade in processed products. It tends to be high-quality, speciality
materials, where the tax is not really an issue when it comes
to competition. These products are imported because that sort
of product is not available in Great Britain and that is what
people want. Tax is not in practice causing serious distortions.
There is no evidence that it has.
Q106 Reverend Smyth: So some of the concerns
that have been expressed may not necessarily be worthy of much
more consideration?
Mr Romanski: I cannot put my hand
on my heart and say that there is nobody in Great Britain who
is being affected, but certainly it is a very small-scale problem.
John Healey: Just to be clear,
the concerns that have been expressed particularly from the industry,
the Quarry Products Association in Northern Ireland and BAA, about
the situation in Northern Ireland versus the UK mainland have
been taken very seriously, and what they want to see is what we
put in the application for, in other words, that for both processed
products and for extracted aggregates, the special relief scheme
would only apply to those that are extracted and used in Northern
Ireland, so that we do not run the risk of distorting the market
within the UK mainland as well.
Q107 Reverend Smyth: You did say that
it was limited to Great Britain. Do I take it then that exports
of virgin aggregates or processed products from Northern Ireland
to other EU Member States would be levy-exempt?
Mr Romanski: The virgin aggregates
exported to another Member State would be levy-exempt. The processed
products exported would contain aggregate charged at 32p a tonne,
because there is not any special relief for aggregate used in
processed products.
Q108 Mr Bailey: Can we just move to enforcement?
You have introduced a number of measures designed to improve enforcement
which would on the face of it seem to be fairly robust. Can you
clarify for us which of these, if any, are new measures being
put in place or whether they are basically an extension of the
existing measures?
John Healey: In one sense all
the measures we are putting in place now are new, because they
are measures that are designed to enforce what is a new levy and
a new system in Northern Ireland. The extra staffing that is being
put in place is new. In the last year that has been increased
from three to seven, and in the next financial year that is due
to go up by another three. So our enforcement effort and our staff
commitment to that will continue and will be increased as necessary,
irrespective of the change in the relief scheme. The links that
we have established to produce the intelligence and cooperation
with the Republic of Ireland specifically on this and related
VAT issues is new. The publicity that we are putting through the
trade press, particularly in Northern Ireland, aimed at the users
of aggregates is new and is being stepped up. The memorandum of
understanding that Customs & Excise has with the Department
of the Environment in Northern Ireland for the information exchange
both ways and also to enable much more joint enforcement action
is new. The conferences that we have staged earlier this month,
both on procurement for the public authorities in Northern Ireland
and also for the agencies that have a potential role to play in
helping enforce the levy and other regulatory regimes relating
to quarrying, is new. The activities, the operational activities
of the enforcement teams, the 140 visits that have been made in
recent months to construction sites near the border with the Republic
are new. The visits and the action taken in all 38 of the alleged
illegal quarries identified by the QPA Northern Ireland are new,
and we have new registrations, we have new tax that has been identified
as liable and due to the Exchequer identified from that.
Q109 Mr Bailey: It sounds impressive.
What sort of guarantees do you have that they will be any more
successful than the old enforcement regime?
John Healey: There are two things
I would hope might give the Committee more confidence. What I
have indicated there is that we are stepping up the enforcement
activity resources and commitment. We are doing that because we
believe it is required. Secondly, if we are able to put in place
the new relief scheme that we propose, I think we can expect a
much greater incentive for quarries and other firms in Northern
Ireland to cooperate with the new relief scheme. What that should
do is therefore reduce the incentive to operate illegally. It
will therefore reduce the degree of unfair competition from operations
that are operating illegally or illicitly, and it should help,
together with the reinforced enforcement effort, to see the levy
operating effectively but also the levels of avoidance and illegal
quarrying diminish.
Q110 Mr Bailey: You would probably agree
that effective co-ordination between the enforcement agencies
is crucial if enforcement is to be effective. What progress do
you think you have made to date on that, and how would you anticipate
this improving under the new scheme?
John Healey: I think the imperative
for much greater cooperation and joint working is not changed
by the nature of the relief scheme that is in place. All of our
experience—short experience on the aggregates levy but much
longer term experience, including in Northern Ireland, on other
regimes, whether it is drugs or fuel fraud or anything else in
Customs—is that with agencies that historically have operated
separately, operated often with a rather different view of the
world, conducting responsibilities and remits that they do not
regard as having any connection with others, it takes some time
to overcome those sorts of cultural, organisational barriers.
I am pretty confident, Mr Bailey, that what we have started here
will mature, because that tends to be the experience with this
type of inter-agency cooperation in other fields.
Q111 Mr Bailey: Assuming that the new
enforcement scheme is up and running, say, by mid-April, what
sort of estimate of increased costs would arise?
John Healey: I do not think the
increased costs are likely to be very significant. The increased
resources that we are prepared to put into this as necessary I
have already given some indication of. They consist in the next
financial year of another three full-time, dedicated, environmental
taxation assurance officers just for Northern Ireland, bringing
the strength to ten. What we will also see is the other law enforcement
officers that Customs operate, who may be dealing with, say, oils
fraud, increasingly picking up intelligence and information on
the movements of aggregates that may help make sure that the levy
is properly enforced. Also, our team of VAT assurance officers,
whilst the primary purpose of any visit to businesses will remain
VAT assurance, are now better briefed and better attuned to some
of the issues that may crop up over levy compliance, and they,
I think, will increasingly play a role as well in helping to reinforce
the enforcement effort and compliance with the levy.
Q112 Mr Bailey: Obviously you have played
down potential increased costs, but have you any idea to what
extent Customs will have to pick up the tab, and will it be from
their existing budget?
John Healey: The short answer
is yes, Customs will pick up the tab, as they should do, and it
will be from within the existing settlement that Customs has overall.
Next year is already a year that is set within the Spending Review
system that we have established with the Government, but let me
say I simply do not foresee a serious problem, and if the Committee
is concerned about that, let me make clear that I am not, at this
point.
Q113 Mr Clarke: I wonder if we could
turn to environmental issues. I am conscious that there would
be involvement from Angela Smith, as the Minister, but part of
the new scheme, of course, does include both a new code of practice
and a new compliance framework. Given the answer to the Chairman
regarding the tight timescales in getting agreement from the EU,
we also noticed that the consultation period on the code of practice
ran from December last year through to 5 March this year, which
leaves an extraordinarily tight window for the Government to respond
to the consultation and to make any changes if we are going to
put the new code of practice and compliance framework in place
for 1 April. Could you comment on how you are going to achieve
that quite large amount of work within what is in effect a three-week
period?
John Healey: The first thing to
explain, I think, is that this is not a traditional government
consultation where a set of proposals are published, comments
are invited, there is a period of reflection and the Government
responds, neither is the publication of the code of practice and
compliance scheme by the DoE Northern Ireland a first stab at
this. Its genesis is derived from the Helm Report previously,
which is based on the work that was done within government to
take up the proposals that were set out by a draft code of practice
by the industry itself earlier last year. So there is a long developmental
history of this work. What this largely iterative process is designed
to do up until 5 March and beyond is essentially to set the framework,
the principles within which the DoE in Northern Ireland would
be able, with the industry and with individual companies, then
to settle the company and site-specific environmental agreements
that will be required as the precondition for the level of relief
that we are now looking for. Not all of that needs to be done
by 1 April. There will be a period in terms of how we envisage
that process beyond 5 March working. Once we have got the State
aid approval, what Customs and the Northern Ireland Environment
Department will be able to do is to write to those quarry operators,
inviting them to complete a very simple application form, that
will confirm the basic regulatory requirements are met and are
in place. DoE Northern Ireland will then rapidly be able to verify
that basic information. They will do that probably via a desk
audit rather than visits, and they will be able then to issue
what one might describe as an interim certificate that will allow
that operator to claim the new relief. That allows, for the duration
that that interim certificate is valid, the detailed work to be
done with the quarry operator, site by site, to come up with the
negotiated environmental agreement, which would be certified by
the Department of the Environment in Northern Ireland and would
enable the operator to continue to claim that new relief, and
certification of those agreements would last for a period of around
two years or so. Perhaps shortly before the expiry they would
be reviewed to see whether the commitments contained in the agreement
had been met, rather in the way that the climate change agreements
operate already, and if they have been, a fresh agreement will
be put in place and eligibility for the continuing claiming of
the relief will continue without any interruption.
Q114 Mr Clarke: I take the point you
make about it not being the normal consultation, therefore there
will not be a period when you are responding to comment, but even
so, there are probably three weeks, 15 working days, in which
you will have to first of all publish the new code of practice
and the framework; from then you will be sending out questionnaires
to those operators for them to complete and return; having a desk
check; and then sending the interim certificates out. Would you
accept that it is still a tight timescale, even given the small
amount of work that you have to do, from 5 March to 1 April to
get something published, printed, questionnaires out, returns
in, desk checks out, certificates back out? It is a very tight
timescale.
John Healey: First of all, much
of the work is going on at the moment, so it is not a square-
one start from 5 March. The second thing is that the critical
date is not 5 March or 1 April; it is the point at which we are
clear that we are going to get the State aid approval, because
until we have that we cannot proceed to put in place this process
that we are preparing and planning in order to get those in the
industry who wish to participate signed up, eligible and therefore
claiming the more generous terms of the relief that we are looking
for.
Q115 Mr Tynan: A certification scheme
has been put in place at the present time, and that would require
that under the proposed new levy scheme, certification systems
would be put in place for government procurement. Have you estimated
the likely revenue gains to the Treasury from levy compliance
in public sector building projects or the revenue losses to date
in the absence of certification schemes?
Mr Romanski: I am not sure we
have any sort of detailed estimates of that sort. The Symonds
Report in terms of the overall extent both of illegal quarrying
and imports on which levy was not being charged managed to establish
that there had been increases in these areas, but was not able
to put any quantification on it. I could not even give you a figure
for the precise amount of levy being lost in Northern Ireland
as a result of this illegal activity at the moment, let alone
break it down into how much of that was occurring in the government
procurement sector, I am afraid.
John Healey: I can give you a
figure that might give you an indication of scale, Mr Tynan. This
is a very important industry to Northern Ireland, and it is obviously
a matter of strong concern to the Committee, but the total cost,
we reckon, in the last financial year of the exemption that we
have in place—in other words the revenue foregone by the
exemption arrangements for the 80% relief—is only around
£10 million. Significant though that is—very significant
to the individual operators and quarries—that gives you
an indication of the sort of scale of the Northern Ireland component
of the revenue streams that relate to the aggregates levy.
Q116 Mr Tynan: So you have no idea whatsoever
of the possibility of gains to the Treasury from compliance? It
is just a situation where you believe there will be a gain for
Treasury—or do you?
John Healey: We have not done
that detailed calculation. It could probably be done. It would
be rough and ready. The amount would be in the sort of proportion
that I have indicated that the Northern Ireland operation of the
levy includes. To give you an indication again, I mentioned earlier
on the enforcement activity, the site visits to construction companies
and some of the quarrying operations that the QPA Northern Ireland
have indicated we have signed up as a result of those registrations
for the levy, but the total levy liability from those sites that
we have now signed up in many cases is only several thousand pounds.
Q117 Mr Pound: One of the by-products
of the quarrying process is the secondary aggregates. Under the
operation of the levy, the cost to the consumer of secondary aggregates
has made it economically unviable; they cannot shift them, they
have been priced out of the market, and they are in fact being
stockpiled. Throughout Northern Ireland quarries are laden with
stockpiled secondary aggregates. Does the new scheme in any way
address this problem?
John Healey: First of all, that
is a common criticism we get from the industry.
Q118 Mr Pound: I am not being critical.
John Healey: Just to refer you
to the Symonds Report, which is our best evidence and analysis
of this, it suggests that there is some evidence of operators
not being able to shift secondary aggregate that they might previously
have been able to do. It was not able to quantify the scale of
the problem, and we have encountered a similar difficulty in examining
this very closely in mainland UK as well, which we have been doing
for at least the last 12 months. One of the great advantages of
the new approach—in other words, the environmental agreements
that are there site by site, operator by operator—is that
they allow a flexibility which the current levy system does not
do to deal with the particular environmental circumstances, the
particular economic circumstances that a quarry might have, so
that if this were an element that we felt we could help to tackle
through an environmental agreement in particular sites, then that
might well form an element of it. We still have not reached that
point because, in relation to Mr Clarke's questioning, we have
not completed either the full consultation or the confirmation
of how the compliance scheme will be designed.
Q119 Mark Tami: Looking at the question
of demolition waste, does the Treasury support the idea of on-site
recycling of this waste?
John Healey: Explicit in the design
of the levy was a desire to see a greater degree of recycling
of demolition/excavation/construction waste, and with a greater
degree of recycling therefore a likely reduction in the demand
for virgin aggregates extraction. That was the very core of the
levy. The general response to that is clearly yes. It is a concern
that there may be levels of secondary aggregate which companies
are finding difficult now to market, and it is a concern particularly
where there are arguments, although the evidence is yet to be
firmly demonstrated, that these are being stockpiled within quarries
and potentially sterilising the reserves that might later be extracted.
We are very conscious of that particular problem, but the interest
in seeing greater levels of recycling is fundamental to the rationale
of the levy.
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