The Battle of the Aggregates Levy! March 20 2014

Ever since its introduction, the Aggregates Levy has been controversial within the UK. Sarah-Jane Williams, of Stephens Scown LLP, explains why the controversy is still raging

The Aggregates Levy was intro­duced in the UK as part of the Finance Act 2001 and came into force in April 2002 and is a tax imposed upon the commercial exploitation of rock, sand and gravel in the UK. The intention of the levy was to improve the environmental impact of the mining industry; encouraging use of secondary or recycled aggregates and to incorporate the environmental cost into the market price. The current rate of the levy is £2 per tonne and has been frozen at this rate since 2009.

As with any tax, Aggregates Levy was unpopular from the outset with the reliefs and exemptions being particu­larly controversial. The British Aggregates Association (BAA) has been fighting against the levy for over 11 years and contends that it has had a detrimental impact on some sections of the industry with a number of opera­tors going into liquidation. It is its belief that the levy constitutes State Aid as it penalises some UK operators financially but not others, which distorts competi­tion and is contrary to Article 107(1) Treaty on the Functioning of the European Union (ex Article 87(1) of the EC Treaty).

Brief Background

In 2002 the BAA submitted its views to the European Commission believing the levy contained State Aid due to the exemption for exported aggre­gates, the exclusion of certain materials and the differing appli­cation of the levy in Northern Ireland.

At this stage the European Commission concluded the levy did not comprise State Aid. The BAA appealed to the General Court of the EU in 2006 seeking an annulment of the Commission's decision but the appeal was dismissed.

The BAA subsequently appealed to the European Court of Justice where the 2006 deci­sion was set aside and referred back to the General Court. In March 2012 the General Court annulled the Commission's origi­nal 2002 decision and referred it back for further consideration.

Following this success, the BAA requested the stay on its appeal be lifted and on 10 April, 2013 the Court of Appeal gave BAA permission to proceed to a full hearing (scheduled for 7-10 October 2013).

Recent Developments

The 2002 decision was annulled on the basis that the Commission had not sufficiently scrutinised whether the levy contained any State Aid in coming to its original decision. As a result of this the European Commission recently announced a Phase 11 investigation into the levy, full details of which have yet to be made public.

The UK Government issued Business Brief 24/13 on 16 August 2013 confirming that a formal investigation into the exemptions and release has commenced. The investigation is considering whether State Aid is contained in the exemptions and relief for the following materials:

Ball clay and china clay: Ball clay and china clay and spoil, waste and by-products resulting from their extraction or separation from any quantity of aggregate.

Other industrial materials: Anhydrite; barytes feldspar; fireclay; fluorspar; fuller's earth; gems and semi-precious stones; gypsum; any metal or the ore of any metal; muscovite; perlite;potash; pumice; rock phos­phates; sodium chloride; talc and vermiculite that are used as aggregate, and spoil from the separation of any of these indus­trial minerals from other rock with which it was won.

Coal, lignite, slate and shale: Material that is wholly coal, lignite, slate or shale and that is used as aggregate; mate­rial that is mainly but not wholly coal, lignite, slate or shale, and spoil from the extraction of or separation from any aggregate of coal, lignite, slate or shale.

Clay: Clay that is used as aggregate.

Spoil from industrial processes: Material that is mainly but not wholly spoil, waste or other by-products of any industrial combustion process or the smelting or refin­ing of metal.

Whether or not the levy constitutes State Aid requires an assessment of the relevant tax exemptions and whether or not they place the recipient in a more favourable position than competitors who pay the tax. It is generally defined as aid granted by a Member State to businesses which is generally incompat­ible with the common market because it has the potential to distort competition and affect trade between EU Member States. The EU Commission regulates the actions of Member States for actions which may inhibit competition and intra­community trade.

What Now?

The UK Government will have to answer a series of questions and provide evidence to the Commission supporting their view that the exemptions do not constitute State Aid. Whilst the investigations are ongoing there has been no request for the suspension of payments and HMRC stipulate in their 24/13 brief that those commercially exploiting aggregate in the UK have a continuing legal obliga­tion to pay the levy.

Should the European Commission and/or the Court of Appeal conclude the exemp­tions are State Aid, and therefore unlawful, there is fear in the industry that the businesses that have benefitted from the exemp­tions will have to repay that aid. This would have a detrimental impact and may make other operators insolvent.

The BAA has concluded in its press release dated 23 August, 2013 that it is deeply concerned by HMRC's IBM Revenue and Customs] flagrant disregard for EU State Aid law and by the potential risk posed to those companies which are being encouraged to continue with exemptions that are now subject to the investigation.

At a time when the UK Government is trying to promote growth in the business sector and to get the UK building again, it is clear that some of the exemptions imposed under the levy are hitting operators hard. Some businesses are withhold­ing payment of the levy pending the outcome of the Phase II investigation and operators may face enforcement action from the Treasury.

Those involved in the aggre­gates industry avidly await the outcome of the litigation currently going through the Court of Appeal and the subse­quent result of the Commission's investigations. The battle of the Aggregates Levy is set to continue and it is hoped that any decisions made will not maim the industry any further.