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A tax on all your houses

QUARRYING

Soon a bland European courtroom will deliver its verdict on the legality of a tax on aggregates that has been bitterly contested since its introduction in April 2002. Paul Thompson reports on the court case that could see the UK Government forced to hand back more than a billion pounds in taxes

BARELY noticeable in the Official Journal for 13 December 2005 is a brief outline of case number T-210/02. Despite its insignificant reference number, the case could turn out to be extremely pertinent indeed, particularly for Chancellor Gordon Brown, if the judges find in favour of the applicant.

The hearing is the culmination of a three-anda-half year battle by industry body the British Aggregates Association against the introduction of a tax on the extraction and use of some aggregates in the UK.

Judges at the Court of First Instance in Luxembou rg listened to evidence that could see Government coffers forced to fork out a tax rebate of £1.3 billion to businesses that have paid the £1.60 per tonne levy since its introduction in April 2002.

Of course the likelihood of any government agreeing to repay such a huge sum is remote, but it has not stopped quarry operators across the country slapping down precautionary claims for rebate on tax they have paid.

'Ideally we would like everyone to get back exactly what they have paid out but it is a very complex issue, ' says British Aggregates Association director Bob Durward. 'Some operators will have noted down the exact amount of aggregates levy paid on all products, others may not because they may have been unable to pass the ext ra cost on to customers.'

Nor is the complexity of the potential repayment just down to the effectiveness of an operator's book-keeping. Various products originating from the same quarry, despite having the same level of tax payable on them, will have different market values. This may have resulted in operators bumping up the price of one grade of stone by more than the £1.60 per tonne tax level to offset their inability to pass on the levy on lower cost material.

'The whole issue is difficult. That the levy is payable on aggregate regardless of grade is one of the reasons it is so unfair, ' says Mr Durward.

'Theoretically, quarry operators cannot even give quarry arisings away because a £1.60 per tonne levy is payable on it. How many quarrymen will have noted that they could only pass on, say, two-th irds of the overall levy on certain products and the full amount on other stone?'

Even if quarriers, already struggling under a mountain of paperwork, manage to dig out an accurate record of tax paid, there is no guarantee the Treasury will see fit to repay any aggregates levy at all.

There are still a number of options open to the Government, including a complete rethink of the tax on aggregate - opening up the possibility that it could levy the tax on all aggregates and quarried stone irrespective of them being primary or secondary aggregates or even currently exempted material.

This is a move many in the industry do not even want to think about but a blanket tax on aggregates is very def initely open to the Government.

'In a sense, if the Government was to impose a tax on all aggregates there is little we could do about it, ' says British Aggregates Association executive officer Richard Bird. 'We may not like it but the tax would not be distorting the market as it is now.'

This is the key issue for the association's court case. The European Commission ruled that the UK Government's decision to reduce the amount of tax payable on stone in Northern Ireland did not amount to state aid. The BAA argues that this is wrong and that the ruling should be annulled (see below, r ight).

The Government agreed an 80 per cent discount on the tax with quarriers in Northern Ireland because of the ease of importing stone across its land border with the Republic of Ireland.

The British Aggregates Association claims quarries in England, Scotland and Wales are also losing business to imported agg regates despite the lack of land borders so the discount amounts to the illegal propping of an industry.

If the Court of First Instance agrees then the ruling could see quarriers in Northern Ireland, who have been paying just 32p per tonne since the aggies levy was introduced, staring at a sudden and urgent need to bump up prices to cover the full £1.60 fee.

But fundamentally, the Treasury would have to rethink the entire levy system, according to Lode van den Hende of Herbert Smith, the law firm representing the British Aggregates Association.

'The Commission would have to alter its judgement on state aid and we don't think it could do this without amending the levy itself, ' he says.

An amendment to the levy could mean either the dream scenario of a rebate for quarriers who have paid the tax, or a relaunch of the stone tax - a 'Son of Aggregates Tax' where the levy is payable by all aggregate producers.

This would leave currently exempt producers facing a huge tax burden.

This is not a problem for Mr Durward and his team. 'If the aggregates levy was replaced with a more straightforward tax that does not protect specific industries, then all previously exempt operators would have to repay the full amount of state aid they had received, plus interest, ' says Mr Durward.

Clearly the court's findings, whichever side they come down on, will prove as controversial as the stone tax itself.

The basis of the claim

British Aggregates Association versus Commission of the European Communities In the court particulars for the British Aggregates Association's case, the main claim revolves around Commission Decision C(2002) 1478fin.

This is the European Commission's ruling that the UK Government did not break state aid rules when it decided Northern Ireland should be exempted from the full force of the aggregates tax.

According to representations from the British Aggregates Association solicitors Herbert Smith: '[The] Commission made a manifest error of assessment in deciding that the distinction made between taxable and non-taxable situations is justified by the logic and nature of the tax system.

'The applicant claims, however, that the objectives of the levy cannot explain the different treatment of similar situations.'

In other words, the Commission should not have come to its original conclusion that the decision to tax some aggregates and not others is warranted because it helps the tax meet its 'green' credentials, and further that the Government has not applied the tax uniformly because it limited its impact in Northern Ireland. This, it argues, amounts to the state aid of an industrial sector and as such is illegal.