2. Introduction
Objectives:
To provide...
• An outline of the Aggregates Levy, its aim/s, and how it works
• An assessment of the extent to which the levy is a ‘good’ and ‘effective’ tax
system
• An analysis of how the levy favourably and adversely impacts behaviour
Outline:
- Defining and exploring the ‘Aggregates Levy’
- Understanding how the Levy works
- Analysing the advantages and disadvantages of the Levy in respect of the
characteristics of a good tax system
- Investigating how the Levy influences behaviour
- Conclusion
3. What is the ‘Aggregates Levy’?
• Aggregate is defined as:
“Rock, gravel or sand and whatever occurs or is mixed with it, as well as in
certain circumstances spoil, offcuts and by-products.” (HMRC, 2010)
• The Aggregates Levy intends to:
“address the environmental costs associated with quarrying operations and
commercial exploitation, and to encourage the use of recycled and
secondary aggregates.” (British Geological Survey,)
• What are environmental costs?
- Noise
- Dust & other air emissions
- Visual intrusion & loss of amenity
- Biodiversity damage
• What is commercial exploitation?
• Are there any exemptions?
- Specific materials , waste products, extraction processes
- Relief credits available
4. How does the Levy work?
- The Levy is a specific one stage non-deductible tax chargeable on the
weight of aggregate extracted
- Must keep records on:
- Aggregates Levy account
- Aggregates Levy tax credits account
- Aggregates Levy bad debt account
- Records of exempt aggregates used
- Invoices
- Used for a 0.1% employer NI Contribution reduction & paid into DEFRA’s
Aggregates Levy Sustainability Fund
Rates:
HMRC, 2010
5. Features of a good tax system
• The 1997 Treasury Statement on Environmental Taxation stated that
Environmental taxes must meet the general tests of good taxation.
• Tests of a good tax:
1. Well designed
2. Adam Smith’s “canons of taxation”
(Lymer & Oats, 2010)
3. Meets objectives without undesirable side-effects
4. Keeps deadweight compliance costs to a minimum
5. Acceptable distributional impact
6. Should not reduce international competitiveness
6. Benefits Offered
- Addresses environmental externalities associated with
extracted aggregate
- Removes environmental cost from taxpayer
- Encourages economic efficiency
- Contributes to sustainable development
- Flexible tax system to deal with economic conditions
- Certainty
7. Problems & Implications
• There has been a great deal of criticism since the aggregate levy was
introduced as it has failed to produce many of the benefits mentioned.
• The levy is not a good tax because of these limitations:
- Poorly designed and incomprehensible.
- Limited impact on environmental improvement objectives.
- Damaging side-effects on SMEs, employment and the economy
- Excessive compliance and administrative costs because of large
amount of exemptions
- Damaging to international competitiveness (equity issues) as it
makes imported aggregates relatively cheaper
- Increased road miles for levy exempt aggregates
8. How does the levy change behaviour?
• Failure to meet the key objective of influencing choice of
material used.
• By-products also carry the levy, resulting in unfair competition.
• Importing products impacts the environment and the UK
economy.
• Loss of large infrastructure projects.
• The levy is not fiscally neutral.
• The effective incidence of tax is wide reaching.
9. Conclusion
• The Levy fails to meet Government’s given tests for
a “good” tax
• Government refuse to set benchmarks to measure
the performance of the Aggregates Levy
• Increases environmental cost contrary to the Levy’s
objectives
• Alters the behaviours of individuals
• Detrimental to the prosperity of the UK economy
11. References
The Aggregates & Recycling Information Network., (2010) Time to scrap the Aggregates Levy, says BAA, Available at:
http://www.agg-net.com/news/time-to-scrap-the-aggregates-levy-says-baa [Accessed 28th October 2010].
British Aggregates Association., (2002) Aggregates Levy: A Good Tax or A Bad Tax?, Available at: http://www.british-
aggregates.co.uk/documentation/doc15.pdf [Accessed 1st November 2010]
British Aggregates Association., (2005) An Analysis Of Trends In Aggregates Markets Since 1990 - and the effects of the
landfill tax and aggregates levy, Available at: http://www.british-aggregates.co.uk/documentation/doc32.pdf [Accessed
28th October 2010].
CDE Global., (2010) Aggregate Levy Final Nail in the Coffin, Available at:
http://www.cdeglobal.com/section/AggregateLevyFinalNailintheCoffin [Accessed 30th October 2010].
The Construction Centre., (2007) The Construction Centre quarries deeper into the new levy on aggregates, Available at:
http://www.theconstructioncentre.co.uk/news/latest-news/aggregates-levy.html [Accessed 28th October 2010].
DEFRA., (2003) Aggregates Levy Sustainability Fund in England, Available at:
http://www.defra.gov.uk/environment/quality/land/aggregates/ [Accessed 28th October 2010].
Friends of the Earth., (2002) The Case for the Full Implementation of the Aggregates Levy, Available at:
http://www.foe.co.uk/resource/briefings/aggregates_levy_ni.pdf [Accessed 27th October 2010].
HMRC., (2010) Aggregates Levy, Available at:
http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcis
e_ShowContent&id=HMCE_CL_000506&propertyType=document [Accessed 2nd November 2010]
Lymer, A. & Oats L., (2010) Taxation: Policy and Practice (17th Ed.), Fiscal Publications.
Meade, J., (1978) The Structure and Reform of Direct Taxation (1st Ed.), The Institute of Fiscal Studies.
They Work For You., (2010) Aggregates Levy Sustainability Fund, Available at:
http://www.theyworkforyou.com/debates/?id=2010-03-30b.791.0 [Accessed 29th October 2010].
Editor's Notes
Good morning, my name is Mark Wilmshurst, and on behalf of my fellow group members (names) I would like to welcome you all to our tax policy presentation on the aggregate levy.
Our objective within this presentation is to firstly offer a brief overview and outline of the aggregate levy, its aims and how it works. Secondly, we will look at the levy from the point of view of an effective tax system and thus the associated advantages and disadvantages of how well the levy adheres to the promoted characteristics. And finally we will scrutinise the impact of the levy on changing behaviour within the construction industry. These objectives will be achieved by following the outline shown.
So, what is the aggregate levy? Well according to the HMRC, aggregate is defined as, “Rock, gravel or sand and whatever occurs or is mixed with it, as well as in certain circumstances spoil, offcuts and by-products.” And hence the levy aims to address the environmental costs associated with quarrying and the commercial exploitation of aggregate, in order to encourage greater use of recycled and secondary aggregates.
The HMRC believes aggregate is commercially exploited when it is exploited in the course of furtherance of a business. This can be in the form of physical removal from its originated or connected sites, mixing with other materials, contractual agreements, or when used in construction purposes. Some examples of the associated environmental costs include: noise, dust, visual intrusion, loss of amenity, and biodiversity damage.
There are several materials and waste outputs from extraction that are excluded from the levy. Such things include: coal, slate, clay, industrial minerals, soil, organic material, lime, and cement. Additionally, aggregate returned to the land at the site it was won, is not taxable and there are other reliefs on the levy, for example when exporting from the UK in the form of aggregate, or if the aggregate has previously been used for commercial exploitation. There are also other intricacies regarding exempt processes such as extracting industrial minerals, and the production of lime or cement from limestone.
The aggregate levy is a non-deductable tax charged at just one stage of the production process and requires the registered quarry operators or extractors to keep detailed evidence and information relating to records of exempt aggregates, and processes, in addition to their aggregate levy account, tax credits, bad debts, and invoices.
The levy was first announced in the March 2000 Budget, and the first levy was in effect from April 2002 at the rate of £1.60/tonne. This has risen in recent years (as you can see from the table), and in the Emergency Budget this year, it was announced that from April 2011, a further 10p increase would be added to the existing levy to establish a rate of £2.10/tonne. As an example, an extractor experiencing 5.5 tonnes of non-exempt by-product material would pay £11.55 from April 2011, compared to £11 in the prior tax year.
The 1997 Treasury Statement on Environmental Taxation stated that Environmental taxes must meet the general tests of good taxation. The test of a good tax means the levy should be well designed, meet objectives without undesirable side-effects; keep deadweight compliance costs to a minimum; have an acceptable distributional impact; and not damage international competitiveness.
In response to the Treasury Statement on what makes a good Environmental Tax, there has been a great deal of criticism since the levy was introduced as it has failed to produce many of the benefits mentioned.
A good environmental tax should be well designed – however, the aggregates levy is difficult to comprehend as it has become an enormously complex piece of legislation.
Moreover, such a tax should be able to meet the objectives set by the Government which claimed that, noise, dust and visual intrusion are costs of quarrying, not accounted for by existing taxation. In addition they stated that the levy would reduce the amount of aggregate used and increase the use of recycled aggregate. In reality UK quarries already complied with the strictest legislation in Europe and there has been little or no stimulus for environmental improvement as a result of the levy.
There is also a need to avoid undesirable economic consequences but it is thought that the levy has damaged competitiveness especially of small and medium sized enterprises. Furthermore, it has driven up imports, causing material to be transported further, and lead to job losses in the rural economy. It has put pressure on public infrastructure budgets as the public sector accounts for almost 40% of all aggregates used.
A good tax must keep deadweight compliance costs to a minimum. However, compliance costs have been high due to the complexity of the levy as there are a large amount of exemptions.
Finally the levy should have protected international competitiveness but it has failed to do this because it has increased production costs. For example, the UK has the highest levy in the EU and Most EU countries have no levy at all. This situation is exacerbated by the high cost of fuel, restrictive driver hour’s regulations and the increasingly congested nature of UK roads.
It is often cheaper to ship aggregates in bulk from countries like Norway than to deliver by road from our UK rural quarries. What is more, the levy is not charged on imported finished products made with aggregates but is still collected on exported finished products made with aggregates.
To summarise the levy fails to meet Government’s given tests for a good tax.
As has already been seen the aggregate levy has both benefits and advantages. I am going to talk about the effect of the tax on people’s behaviour.
Firstly, the tax was introduced in order to promote the use of materials which had a smaller impact on the environment, known as secondary aggregates. However, the tax has failed in this objective because for many construction projects only primary aggregates can be used as these better meet the needs of construction.
Secondly the levy has had a big impact on many quarry companies. When quarrying for one of the primary aggregates, other aggregates are produced as by-products. The by-products are classified as secondary aggregates and so normally would not be subject to the levy, however because they come from a site producing primary aggregate the by-products will have the tax applied. This creates unfair competition as secondary aggregates will always be purchased over by-products because they carry no tax and are therefore cheaper. There are large stock piles of by-products going to waste while secondary aggregates continue being quarried, adding further to environmental damage, which goes against the objective of the tax.
The construction industry is now choosing to import many concrete products instead of buying them in Britain. This is because although concrete products contain aggregate they are not subject to the tax upon entering the UK. They are therefore cheaper than British products, which have either used British aggregate or used aggregate which was imported in its raw state, both of which carry the tax. Importing goods has a significant impact on the environment in terms of emissions produced in transportation and increases the environmental cost of using such products. Importing can have serious effects on the quarry industry in the UK, putting quarries at risk of bankruptcy and the potential loss of jobs both of which will impact the UK economy.
The Government itself will also have to pay the levy when it undertakes large infrastructure projects such as building roads, bridges, schools and even buying grit for icy roads. Before the spending review the government had not increased its budget in line with increases in the levy meaning that fewer infrastructure projects would have been able to go ahead.
It seems very clear that the aggregate levy is not fiscally neutral because it distorts the decisions made by individuals. The distortionary effects include importing aggregates, reducing infrastructure projects and buying secondary aggregates from different sources in order to avoid the tax. The formal incidence of tax (which falls on people who actually pay the tax) falls on those people buying aggregates for use in a construction project. The effective incidence of the levy (which falls on people whose wealth is reduced because of the tax) has wide reaching effects, falling on quarry companies struggling to remain afloat, workers in the industry who may lose their jobs or suffer pay cuts as well as communities who will suffer from a road or a bridge not being built.
