Who Pays The Levy? - There is an unexpected third party liability for aggregates levy, warns JEREMY DE SOUZA.

THE AGGREGATES LEVY was the main feature of Finance Act 2001. The postponement of the General Election as a result of the foot and mouth crisis led to the Bill being 'debated' under a Government guillotine imposed from the outset. The controversial nature of the new tax meant that the Opposition parties had to devote almost all the time allocated to questioning the environmental case for and the economic consequences of the imposition of this tax from next April.

What constitutes the site?

The issue as to who might be a registrable taxpayer was only touched on briefly during the debate. But even that limited amount of discussion produced a revealing statement from the Financial Secretary to the Treasury, Stephen Timms. In the context of section 24(7), Mr Timms said:

'Customs and Excise are given powers to decide the boundaries of any premises for registration purposes to safeguard against avoidance of the levy by businesses that might otherwise locate taxable activity outside previously agreed boundaries.'

This could mean, in practical terms, that where the owner of Whiteacre has agreed to provide a contractor erecting a new building on Blackacre with the use of his land for access and parking, he could find that part of Whiteacre has been included within the registered site.

Joint and several liability

While Customs would be unlikely to select the owner of Whiteacre as the person to be registered in relation to the site, this does not mean that he could not be asked to underwrite the levy if the contractor defaulted.

At an early stage in the draft legislation process, Customs identified the fact that there was no regulatory requirement under the general law similar to that requiring the operator of a landfill site to hold a waste disposal licence. The result was the identification of a group of potential candidates. Under section 22(3), these are all to be jointly and severally liable even though only one of them is the registered levy payer.

Non-business exclusion

The only amelioration is that a person who is within the list of potentially liable people under section 22(1) is, by reason of section 22(2), only liable if his participation is 'in the course or furtherance of a business carried on by him'. The effect of this exclusion may, however, be limited. While it would clearly exclude a householder who was employing a builder to erect an extension, the excess profits tax case law suggests that almost anything done by a non-charitable company would be outside it. For VAT, a landlord is normally regarded as within the scope and it would be prudent to assume that the same will apply for aggregates levy purposes.

Registration

The aggregates levy is similar to landfill tax in being based on weight, rather than price. It follows that, even though Parliament may have decided that others should be potentially liable, only one person can actually be responsible for the accounting to Customs for the tax.

It is clear that, in relation to any particular site, more than one person may prima facie be registrable under section 24(2). Customs have therefore been given power, under section 24(4), to exempt supernumeraries from registration. Such provision is to be made by regulation, and no draft had been made available at the date of writing.

The position has been complicated by a concession made as a result of the first (of three) consultations on the proposals for the tax, and contained in section 19(3)(b), deferring the tax point where aggregate is moved from a quarry to another site in the same registration. It may, therefore, be of financial importance for one particular party to secure the actual registration.

As this candidate for registration may not be the most well heeled, Customs' choice could be of material significance to those guaranteeing its liability. Landowners and their advisers will need to bear in mind this possibility.

Occupation

Before considering the six scenarios postulated in section 22(1), it is necessary to address the concept of site operator. Section 21(1) provides for two types of person to be treated, for the purposes of section 22(1), as within that category:

(a) the person who 'occupies' the site; and

(b) some other person who 'exercises any right of control over aggregate' on the site, which is defined in section 21(2) as 'doing' one of four things:

• winning aggregate from the land;

• carrying out an industrial crushing process in relation to rock;

• carrying out an exempt process within section 18(2); or

• storing aggregate.

The person identified in (b) is likely to be the registered operator, but the fact that there is such a person independently of the occupier does not mean that the occupier ceases to be within the joint and several class.

This leads one to consider what constitutes occupation for this purpose. Despite having this issue drawn to Customs' attention, the draftsman has not thought it desirable to provide any form of definition. On the basis of the general law, there are two potential lines of approach.

Land law occupation

Under land law, it would be necessary to distinguish between situations in which a lease had been granted, where the tenant has legal 'occupation', and those in which there is a mere licence, where the licensee has 'possession' and the owner retains 'occupation'. One would expect the operator of a quarry to hold a lease, but there can be circumstances in which this is not the case. While those in the rating case, Andrews v Hereford RDC [1964] 10 RRC 1, are unlikely to have been copied since the current health and safety legislation was introduced, there may well be instances in which the grant of a lease was avoided in order to escape from the lease premium provisions of section 34(1), Taxes Act 1988.

Where construction works are being carried out, it is normally unsatisfactory for a lease to be granted at the outset which is liable to forfeiture in the event of the construction works not going according to plan (very few do). An owner contracting with a developer for the erection of a new building, of which the developer is to be granted a long lease on completion, will normally only grant the developer a licence to occupy the site during the construction period. If the land law concept of occupation is to apply for aggregates levy purposes, such owners will be within section 21(1)(a).

Rateable occupation

If, however, the courts were disposed to have resort to the concept of occupation as determined by case law for the purposes of rating, the owner of a construction site would almost certainly be free of liability under section 21(1)(a). Under, inter alia, Re Briant Colour Printing Co Ltd [1977] 1 WLR 942, the person with de facto possession is the rateable occupier. One lives in hope that realism will persuade Customs to adopt the rating definition of occupation, and the point has been raised with the Treasury.

The accountable parties

The Government's desire to bring imports within the scope of the tax and not fall foul of the European Treaties' prohibition on import duties within the Union has led to a wider range of potentially chargeable sites than quarries. Those where aggregate is processed or mixed have had to be included. Section 21(1) reflects the variety of circumstances which have to be provided for:

• where removal is from the quarry, both 'operators' of the quarry are liable;
• where removal is from a site to which an exempt process was supposed to be (but had not been) applied to the aggregate, both the two 'operators' and the owner of the aggregate;
• when sold outside the quarry (or another site of the person registered in relation to the quarry) or used for construction purposes, the vendor or user;
• if that person is not the 'operator', that person and the two 'operators';
• where aggregate is mixed off-quarry, the owner of the aggregate and the two 'operators' of the site where it is mixed; and
• where aggregate is mixed at the quarry (or a connected site), both the owner of the aggregate and the two 'operators' of the site.

The landowner's dilemma

In the light of the uncertainty as to the meaning of section 21(1)(a), landowners are certainly going to have to be advised to take an indemnity against any possible liability. In many cases, this will need to be backed by a bank guarantee. If an indemnity is considered necessary in relation to an extraction operation, or a potential industrial process (at the moment only coated limestone has been identified by Customs as a problem area) and a guarantee is not available, the owner may well decide not to proceed with the transaction.

Where the owner's own land is being developed, his professional team should be expected to have taken the risk into account. But where adjoining land is involved, especially on an informal basis, the owner would be surprised to hear of the risk he appears to be running.

Finally, where the extractor, processor or developer is already in contractual possession, the absence of any statutory indemnification under the transitional provision, section 43, could create serious problems for an owner. This problem was drawn to Customs' attention, but no change was made to the second draft of the legislation to take account of it.

The role of the professional

One hopes that both the section 43 lacuna and the meaning of 'occupation' will be addressed in next year's Finance Bill. In the meantime, tax practitioners will need to ensure that the accountability provisions of this tax are taken on board by their colleagues in the property and audit departments.

Jeremy de Souza is a consultant to White & Bowker, Winchester.

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