Contractors will not be able to avoid aggregates levy by purchasing materials before exemption ends, says expert

Out-Law News | 27 Mar 2014 | 9:54 am | 3 min. read

Contractors that use clay, slate or shale for construction purposes will not be able to take advantage of a tax exemption due to end on 1 April by purchasing materials now, an expert has warned.

Exemptions to the aggregates levy, payable on the commercial exploitation of rock, sand and gravel, will be suspended from the start of next month while the European Commission investigates whether these break its state aid rules. Although any tax will be refunded if the exemptions are not found to be breaking the rules, tax expert Ian Hyde of Pinsent Masons, the law firm behind Out-Law.com, said that the suspension would lead to added regulatory red tape for contractors in the meantime.

"Some contractors are suggesting that simply paying now for aggregate supplied after 1 April 2014 will ensure the exemption still applies," he said. "However, this will normally not work, as if the buyer uses the aggregate after 1 April 2014 for construction and no aggregates levy has previously been paid on it, the use will itself trigger an obligation on the contractor itself to pay the tax."

"Buyers will want contracts for sales after 1 April 2014 to provide for a price rebate if the exemptions are reinstated. Getting an agreement from the supplier to repay some of the price if it turns out that the exemption was valid is all well and good, but will only be as good as the financial position of the supplier. The market in aggregates may also be subject to some turbulence as a result of the changes: buyers may need to choose between an aggregate that was never exempt at, say, £10 a tonne and an aggregate that used to be £9 a tonne but is now £11, with the prospect of a repayment of £2 a tonne," he said.

The aggregates levy was introduced in April 2002 and is payable when rock, gravel, sand and whatever occurs or is mixed with it is commercially exploited. It was introduced to encourage the recycling rather than further extraction of these materials, and is payable at a basic rate of £2 per tonne. Certain materials are exempt from the levy including coal, lignite, shale and slate; clay, soil and organic matter; and certain industrial minerals specified in the legislation.

The European Commission has begun an investigation into the levy following a complaint by the British Aggregates Association (BAA), which has claimed that the taxing of certain activities and materials but exemption of others amounts to illegal state aid. The BAA's argument is that the exemptions provide a competitive advantage to businesses using or supplying exempt materials, which in some cases in construction are used for exactly the same purposes as materials which are not exempt.

The Commission is not investigating the aggregates levy as a whole, as this was previously found to be compatible with EU law by the Court of Justice of the European Union (CJEU). Its investigation is in its early stages, and tax expert Ian Hyde said that businesses would face considerable uncertainty and ongoing inconsistencies until the Commission finalised its position.

"Not all exemptions from aggregates levy are being suspended and the inconsistencies in the legislation remain," he said. "For example, aggregate removed along the course of dredging a canal will remain exempt but not dredging a lake."

"Whether or not the BAA is right that the tax as a whole is unfair, this new round of changes makes the position even more complex. Suppliers and buyers will be in a state of limbo until the Commission has made a decision – furthermore, these companies will need to work out how they are going to deal with the commercial risks resulting from the uncertainty," he said.

If the Commission ultimately concludes that the exemption was unlawful, there was also a risk that those who benefitted from it in previous years would be required to pay the tax they "should" have paid, Hyde said.

"If this happens – and it's by no means clear at the moment – suppliers faced with a claim from HMRC for prior years may want to pass on any additional cost to their customers. However, depending on the supply contract, customers would presumably resist paying on the basis that they bought on the assumption that there was no levy," he said.