PwC (Posted 22.03.140

‘Skip tax’ row could rear its head again.

Changes in Budget to landfill tax mean ‘Skip tax’ row could rear its head again.

· Landfill tax rates increase in line with RPI from 1 April 2015
· New testing regime for materials to combat exploitation of difference in tax rates
· Reduction in tax credit scheme funding community environment action close to landfill sites

A hat trick of surprise changes to landfill tax rules in this week’s Budget could reignite the industry’s ‘skip tax’ furore of 2012, and will mean operators need much tighter monitoring of customers’ waste brought to their sites.

Wednesday’s Budget replaced an annual £8 escalator on landfill tax, with an RPI linked increase. From 2015/16 the standard rate will be £82.60 per tonne and the lower rate will be £2.60 per tonne. The lower rate is applied largely to inert waste that poses limited harm to the environment.

In 2012, the so called ‘skip tax’ caused an industry furore when skip operators took umbrage at guidance issued by HMRC in an attempt to ensure that the tax was applied correctly. The main issue related to the tax treatment of “fines”, which is the residue sent to landfill after the skip waste has been processed to remove recyclable material. HMRC’s view was that in most cases these fines would not qualify for the lower rate of tax. The skip operators thought differently and were concerned about the potential significant increase in their cost base.

Jayne Harrold, environmental tax specialist at PwC, said:

“The industry will be relieved that the escalator was not renewed, and there’s more certainty over the trajectory of rates in the immediate future with the RPI link. But there's no avoiding the fact that the huge differential in rates between the lower and higher rates still causes compliance risks and distortion of the market. A further change to the rates is likely once the consultation over the lower rate testing regime is concluded.”

HMRC has invested significant time in discussions with the industry on the testing regime, to achieve guidance that is operable in practice. The latest draft guidance on the application of the lower rate of tax was issued for consultation last September, and the introduction of mandatory testing of waste was one of the more hotly debated aspects.

This week, the Chancellor confirmed that “loss on ignition testing” will apply to fines from waste transfer stations from April 2015. This will supplement existing waste acceptance procedures and inspections. The test will burn a sample of material and measure the amount of volatile and combustible material like paper, plastic, organic matter and carbonates. If the amount of material burned off exceeds 10% then the standard rate of tax will apply.

Jayne Harrold, environmental tax specialist at PwC, said:

“While draft legislation has yet to be released, it’s likely to be a controversial move amongst operators. There’s a significant financial driver to seek the lower rate of tax, and it’s the operators who have to foot the bill if the decision is wrong. One change that would make a real difference would be to make the customer responsible for certifying that their waste qualifies for the lower rate of tax and liable to penalties if this is later found to be wrong. In other environmental taxes, such as aggregates levy and climate change levy, there are civil penalties for customers who issue incorrect certification to claim tax reliefs.”

In a third change announced in the Budget, the Landfill Communities Fund (LCF) was reduced. The scheme allows operators to offset some of their landfill tax liability by paying money towards locally based environmental schemes. The cap on contributions is being amended to 5.1% from 6.8%, with the saving being used to fund a one-off increase to address waste crime.

Jayne Harrold said:

“The landfill tax has been one of the most successful environmental taxes in terms of changing behaviours and reducing waste. Reducing the Communities Fund is reducing investment in local community projects, skimming £23m of the landfill tax take and diverting it back to the Government. It would be good to see additional action to address waste crime and some accountability and transparency around the way that the money is spent.”