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The aggregates levy comes into effect on 1 April 2002, but those who were hoping that it would be a straightforward exercise, should think again, warns IAN FLEMING FIIT.

CUSTOMS HAVE ISSUED their General Guide to Aggregates Levy following the publication of the relevant legislation in sections 16 to 49 of, and Schedules 4 to 10 to, the Finance Act 2001. This legislation is supplemented by the Aggregates Levy (Registration and Miscellaneous Provisions) Regulations 2001 which came into force on 11 January 2002, and which will be followed by the Aggregates Levy (General) Regulations which will have effect from the introduction of the levy on 1 April 2002.

Customs' guide is slightly unusual in that it is drafted in the form of 109 questions and answers, split into 17 sections and six appendices.

It would be comforting to think that the aggregates levy, whatever the fiscal or environmental arguments are to support its introduction, would be simple, without the complexities of landfill tax, but anyone reading the guide will soon realise that this is just a dream. The levy is not just about extracting aggregate from holes in the ground; the guide informs us that:

Commercial exploitation

Aggregate is defined as being commercially exploited if it is exploited in the course or furtherance of a business by the person carrying out the exploitation (a definition unlikely to qualify for a Plain English Award).

A quantity of aggregate is subjected to exploitation if any one of the following applies:

• it is removed from:
  • the originating site;
  • a connected site that is registered under the same name as the originating site; or
  • a site where it had been intended to apply an exempt process to it, but this process was not applied;
• it becomes subject to an agreement to supply to any person, e.g. when a contract is made;
• it is used for construction purposes; or
• it is mixed with any material or substance other than water, except in permitted circumstances.

'Used for construction purposes' is defined as being used as material or support in the construction or improvement of any structure, or it is mixed with anything as part of a process of producing mortar, concrete, tarmacadam, coated road stone or any similar construction material. This is reasonably straightforward, but problems may arise when a contract is entered into. Consider an agreement between a quarry owner and a motorway construction company to extract one million tonnes of granite road stone. This immediately leads to the tax point question. Section 12.3 of the guide says:

'The tax point is when a quantity of aggregate is first subject to commercial exploitation. This is the earliest of the following:

• ' it is removed from its originating site or a site under the same registration as the originating site or a site where it had been intended to apply an exempt process to it but this process was not applied;
• ' it becomes subject to an agreement to supply it to another person;
• ' it is used for construction purposes; or
• ' it is mixed, otherwise than in permitted circumstances, with any material or substance other than water.'

In other words, it seems that £1.6 million aggregates levy is payable on the first return after the contract is signed, rather than on a load by load basis as the aggregate is delivered.

Scope of the levy

Looking at the scope of the levy other than from the commercial exploitation viewpoint, certain minerals are specifically exempt (Schedule A) and the British Geological Survey definitions are used for this purpose. Material previously used for construction purposes is not liable to the levy, neither is material which is removed from its originating site prior to 1 April 2002.

Reverting to the tax point question, tax is due at the earliest of removal and mixing. In many cases, e.g. tarmacadam plants, mixing will take place on the same day as delivery but the commercial production of sand/gravel mixes could take place well before the date of delivery and would thus create an earlier tax point.

Calculating the levy due

Section 11 of the guide deals with the calculations necessary to determine the levy payable when taxable aggregate, tax paid aggregate, recycled material, and other non-taxable material are mixed. Provided that a weighbridge is available on site, the calculations are straightforward. Like landfill tax, if there is no weighbridge, agreement has to be reached with the local aggregates levy officer on an alternative method. Essentially, levy is due on the weight of taxable material included in the mix at £1.60 per tonne.

As with landfill tax, VAT is payable on the levy inclusive amount charged for the supply.

Registration

The person who has to be registered for the levy is the legal person, as with VAT, who is exploiting or intends to exploit aggregate commercially in the United Kingdom. Unlike VAT, however, there is no registration threshold.

Registration is not required for the extraction of aggregate within the confines of a building site, or which is removed from a river, canal, watercourse or harbour in the course of genuine dredging work for the purposes of navigation. It is also not required for the disposal of aggregate arising from any highway excavations to improve, maintain or construct that highway. All these exemptions are subject to the requisite planning permission being in place.

Liability to the levy

As already stated, commercially exploited minerals listed in Schedule A are exempt, as is the process of cutting dimension stone, e.g. monumental stone, manually or mechanically by saw or chisel to a specified measurement, and the processes of producing lime or cement from limestone, or limestone and any other substance. All aggregate used in the production of lime and cement is exempt.

Certain aggregates are deemed to be non-taxable where the aggregate is not commercially exploited in the course or furtherance of a business, because it:

• is moved between sites under the same aggregates levy registration;
• is removed to a registered site to have an exempt process applied to it;
• is removed to any premises where china clay or ball clay will be extracted from the aggregate;
• has previously been used for construction purposes;
• was removed from its originating site before the commencement of the levy;
• is being returned to the land from which it was won;
• is being used for an agricultural or forestry business for the purpose of that business on the site or land held or occupied with that land.

Anything that consists wholly or mainly of the following is exempt from the levy:

• clay, soil, vegetable or other organic matter;
• coal, slate and shale;
• china clay waste and ball clay waste.

It should be noted that any overburden arising from the extraction of any exempt material or from the extraction of any industrial minerals is taxable unless it is itself a specifically exempt material. In addition spoil, waste, off-cuts and other by-products resulting from the application of an exempt process are taxable. This is particularly important in view of the fact that there is no registration threshold. For example, if limestone is being extracted from a new quarry to manufacture cement, the exploitation is exempt from the levy, but if the overburden or waste material is commercially exploited, then the operator/owner of the quarry will be required to register and pay levy on that material.

Other exempt materials are drill cuttings from the seabed, material arising from utility works, e.g. gas or water pipeline laying, aggregate from building sites, navigation dredging and highway construction.

Perhaps surprisingly, 'wholly' is defined as 100 per cent of the material in question, and 'mainly' means more than 50 per cent of the material is made up of exempt material. If, for example, as is stated at section 3.2, 'anything that consists wholly or mainly of the following is exempt from the levy ...', the words 'wholly or' are surplus to requirements as the 'mainly' condition is sufficient to obtain the exemption.

Reliefs

A quantity of aggregate may be relieved from the levy, by way of credit or repayment, after a liability to levy has occurred, under the following circumstances:

• it is exported from the United Kingdom in the form of aggregate;
• it is used in an exempt process after the levy has been brought to account;
• it is used in a prescribed industrial or agricultural process;
• it is waste aggregate disposed of by dumping or otherwise, e.g. sent to landfill or returned to the originating site.

Appendix B to the guide lists the industrial and agricultural uses that qualify for levy relief.

Straightforward commercial documentation is required to be retained to support relief from the levy.

Accounting for the levy

The rules for accounting for the levy are very similar to landfill tax and VAT, in that returns are submitted on a quarterly basis and must be accompanied by the payment due within one month of the period end. With the aggregates levy, Customs offer a direct debit facility when the payment will be taken from the nominated bank account seven days after the due date for manual payment.

There is no legal requirement to show aggregates levy on the sales invoice, but a statement that levy has been accounted for at £1.60 per tonne is acceptable. If the registered person wishes to show the amount of levy paid, it can be shown on a separate line on the invoice.

An aggregates levy account must be maintained showing the levy due each quarter and any credits to which the registered person is entitled, and errors adjusted.

If a customer becomes formally insolvent owing money in respect of levy, bad debt relief may be claimed provided that the customer is not a connected person, aggregates levy has already been accounted for and paid, and the debt is written off in the financial accounts and transferred to a bad debt relief account.

Record keeping

The registered person must be able to demonstrate from the records kept, that the amount declared on the aggregates levy return is the correct tax liability. As well as commercial documentation for aggregate that has been commercially exploited, records have to be maintained relating to levy paid aggregate purchased, and non-taxable materials brought on to a site.

Mixing records and other records demanded as a condition of approval must also be retained.

Penalties and interest

The penalties for the evasion of aggregates levy are severe. Paragraph 16.12 states that where the levy is evaded and the conduct involves dishonesty, the taxpayer will be liable to a civil penalty equal to the amount of levy evaded or sought to be evaded plus the actual amount of levy evaded (that is in plain English, effectively a 200 per cent penalty).

At paragraph 16.7 of the guide, which relates to a deliberate incorrect declaration of relief from the levy, the penalty is described as criminal and is double the amount of levy due. If it is a genuine error, the penalty is 105 per cent of the levy due. The minor crimes of failing to keep records, failure to render returns and other regulatory offences incur a penalty of £250, and for continued failure to produce records, a further penalty is imposed of £20 a day. Penalty interest on unpaid levy will be charged at ten per cent above the normal interest rate and will be compounded monthly. The normal rate is that applicable under section 197, Finance Act 1996, but the guide does not say so. Errors on returns will be penalised at five per cent of the amount under-declared plus interest as appropriate.

Under what circumstances Customs will treat the evasion of levy as a criminal offence remain to be seen. The penalties for the investigation and prosecution of criminal offences on summary conviction are the statutory maximum, or imprisonment for up to six months, or both. On indictment, the financial penalty is any amount, or imprisonment not exceeding seven years, or both.

Reviews and appeals

The review procedure is available to anyone who is, or who will be affected by, one or more of the 12 decisions listed in the guide. These generally cover the same areas as VAT, e.g. amount of levy due, liability, penalties and interest, registration, security payments, and entitlement to credit of levy.

The system for resolving disputes involves a two-stage process. The first is a mandatory review by Customs carried out by a nominated reviewing officer, independent of the officer who made the decision under review. If the decision of the reviewing officer is not acceptable, or no decision is given within 45 days, an appeal can be lodged with the VAT and Duties Tribunal.

Conclusion

Overall, the guide provides a fair and concise summary of the legislation. However, as highlighted in this article, a number of issues will potentially create serious problems for this industry, not least the tax point for contracts and the penalty régime. A simple tax, it is not.

Ian Fleming is a group VAT specialist with Armstrong Watson, Carlisle.

Issue: 3848 / Categories: