Out-Law News 2 min. read

Relief for businesses as European Commission confirms UK aggregates tax exemptions were legal

All but one of the exemptions offered by HM Revenue and Customs (HMRC) from a UK tax on the commercial exploitation of rock, sand and gravel between 2002 and 2014 were compatible with EU law, the European Commission has said.

The UK government has said it will reinstate the approved exemptions, backdated until 1 April 2014 when they were originally suspended pending the Commission's investigation. However, Treasury minister Priti Patel said that she was "extremely disappointed" that the Commission had "changed [its] mind" by finding that part of the UK's exemption from the tax for shale and spoil for shale extraction was not justifiable under state aid rules.

Tax expert Steven Porter of Pinsent Masons, the law firm behind Out-Law.com, said that businesses affected by the suspension of the exemptions would be "relieved" by the Commission's decision.

"However, although the government has said that it intends to reinstate the exemptions and to backdate them to 1 April 2014 when they were suspended, this will not happen immediately," he said. "Businesses therefore need to continue to keep records to show that they have paid the levy on these materials and that they will not be 'unjustly enriched' by the repayment of the levy to them."

"The position is much less satisfactory for anyone who benefited from the exemption for shale before it was suspended in 2014. These businesses could potentially have to repay the benefit of the exemption, as the Commission has ordered the government to recover the aid going back to 2002. We need to wait for the outcome of the government's discussions with the Commission to see how this repayment obligation will be imposed," he said.

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

In April 2002, the British Aggregates Association (BAA) challenged these exemptions, claiming that excluding some materials but not others from the tax was illegal state aid. State aid refers to advantages or incentives granted to certain commercial companies by national or local governments to the disadvantage of others. Although the Commission originally decided not to raise any objections to the levy, this decision was annulled by the European General court in March 2013. The UK government ended the exemptions in April 2014 while the Commission conducted a full state aid investigation.

The European Commission has now ruled that most of the exemptions were legal. However, it found that the exemption for shale and spoil for shale extraction was not justified, because shale was deliberately extracted for commercial use as aggregates. Exempting shale from the levy therefore did not contribute to the tax's environmental objectives. This did not apply to the extraction of shale as a by-product of coal extraction, in ceramic processes, to replace clag, slag or other materials in cement manufacture or that could be "demonstrably used for purposes other than aggregate", all of which were entitled to an exemption, it said.

Companies that were exempted from paying the levy on shale products that should not have been exempted from the levy would have to pay back any "undue advantage" they received as a result of this, the Commission said. However, amounts below the then-applicable 'de minimis' threshold of €200,000 over a three-year period would not need to be paid back, as the Commission does not consider payments below this threshold to have an "appreciable effect on competition and trade", the Commission said.

The UK government said that it would reinstate the permitted exemptions "as soon as possible in the new parliament, with effect from the date of the suspension" and repay any taxes paid by businesses that would otherwise have been exempt. It said that it would "seek to work with the Commission and businesses to reduce the impact" of the need to recover tax that should have been paid on shale extraction between 2002 and 2014, in line with its legal obligations to recover unlawful state aid.

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