Plastic packaging tax: due diligence requirements

Businesses that do not carry out adequate due diligence or keep sufficient records of the checks they have made could be held jointly and severally liable or secondarily liable for any plastic packaging tax (PPT) that has not been paid by another business in their supply chain.

HM Revenue & Customs (HMRC) has issued guidance on the checks required. However, it does not provide a list of checks that must be carried out, only examples of appropriate checks. Each business must decide what checks are relevant, reasonable and proportionate depending on their circumstances.

Businesses dealing with goods where a PPT liability could arise should review existing contracts, take PPT into account in new contracts and carry out due diligence on existing suppliers before the tax comes into force.

Plastic packaging tax

A tax on plastic packaging manufactured in, or imported into the UK, that does not contain at least 30% recycled plastic has applied since from 1 April 2022. The rate of tax is £200 per metric tonne of plastic packaging.

Manufacturers or importers of 10 or more tonnes of plastic packaging over a 12-month period must register for the tax. Those below this threshold will not be subject to the tax.

A charge to PPT arises when a chargeable plastic packaging component is produced in the UK by a person acting in the course of a business or where it is imported into the UK on behalf of such a person. It only applies to ‘finished’ products. A component is finished if it has undergone its last substantial modification.

Imports of packaging which already contains goods, such as plastic bottles filled with drinks or plastic packaging around goods, will also potentially be subject to the tax, if the 10 tonnes de minimis limit is exceeded.

There are exemptions for:

• plastic packaging manufactured or imported for use in the immediate packaging of a medicinal product;
• transport packaging used on imported goods;
• packaging used as aircraft, ship and rail stores, and;
• components that are permanently designated or set aside for use other than a packaging use.

PPT can also be deferred, or reclaimed if already paid, where packaging is exported within 12 months.

For full details of the tax, see our Out-Law Guide: Plastic packaging tax.

Although it is the importer or manufacturer of packaging components that is primarily liable for PPT, others in the supply chain can be made secondarily liable or jointly and severally liable for the tax where they know or ought to have known that PPT has not been paid.

The provisions apply not just to those involved in the production or importation of the packaging components but also those involved in transporting or storing products and operators of online marketplace or fulfilment businesses.

The secondary liability and joint and several liability provisions mean that any relevant business needs to conduct due diligence to ensure that it cannot be said that it ought to have known that PPT was not paid.

The corporate criminal offence of failure to prevent the facilitation of tax evasion may also be relevant if employees or associates of the business have facilitated the evasion of PPT by another person and the business does not have reasonable prevention procedures in place.

Checks required

HMRC guidance makes it clear that supply chain due diligence is vital when it comes to PPT. The reasoning behind this is twofold. Firstly, it is relevant in identifying which entity in the supply chain is responsible for accounting for and paying PPT. Secondly, the legislation permits HMRC to issue secondary liability and joint and several liability assessment notices. These notices can be issued to any other person acting in the course of a related business, where another entity in the supply chain has failed to pay PPT and the business knew or ought to have known that it had not paid.

If a notice is issued in such circumstances, the only ways in which it can be reversed or revoked is by demonstrating that the taxpayer took all reasonable steps to verify the supply chain, including conducting proper due diligence on others in the supply chain or because the amount on the notice is not just and reasonable. Despite this, HMRC has not issued a list of prescribed due diligence that must be undertaken.

Businesses should already be carrying out due diligence checks to reduce the risk of fraud and exposure to other risks such as modern slavery or the corporate criminal offence of failure to prevent the facilitation of tax evasion. Therefore it may be possible to adapt existing systems to ensure compliance with PPT due diligence. With the expansion of plastic taxes around the world, multinationals should establish a system that can be adapted as necessary to ensure that their due diligence is compliant with all the relevant regimes.

As a minimum, the HMRC guidance states that the checks should be carried out every 12 months. They should be repeated sooner if the business is made aware of changes before the 12 months have passed. 

Regulations set out the factors that HMRC may take into account when considering whether to make another business secondarily liable or jointly and severally liable for PPT. These include considering whether the parties are connected or whether they have any contractual or commercial arrangement. Another factor is whether the business has conducted due diligence on the person primarily liable to PPT.

The due diligence mentioned specifically in the legislation is requiring any information or evidence from that person, keeping that information and assessing the reliability or veracity of the information or evidence provided with reasonable care. Merely obtaining the information is not sufficient. Its reliability and veracity also need to be assessed. Businesses will need to build these checks into their on-boarding process for new suppliers and conduct further checks on existing suppliers.

The legislation also specifically mentions including contractual terms in relation to ensuring the payment of PPT in commercial agreements. These terms should be included routinely in contracts where the supplier may be liable to PPT in relation to the goods supplied.

Manufacturers of plastic packaging

The checks undertaken should be relevant, reasonable and proportionate depending on the circumstances.

Manufacturers of plastic packaging components will need to carry out more extensive due diligence on their suppliers of recycled plastic. This may include checking that they are registered in the UK as a reprocessor or checking with equivalent international accrediting bodies. They may also need to carry out, or commission from reputable third parties, physical inspections or quality assurance audits to evidence that the plastic supplied is recycled.

If the price paid for recycled plastic is less than the market rate, the manufacturer should find out the reason for the low cost, as this could be an indicator that the plastic is not recycled.

Where the liability to PPT of the manufacturer depends upon the actions of the customer, such as where the customer performs the last substantial modification, will use the packaging for medicine or exports the packaging, the manufacturer will need to carry out due diligence on the customer.

To minimise the manufacturer’s PPT liability, significant contracts with customers should be tailored to the particular circumstances to ensure that the manufacturer can obtain the confirmations and evidence from the customer that the manufacturer needs to claim exemptions and credits. For example, where the customer is going to substantially modify the packaging components, the contract should confirm this and confirm that the customer will account for PPT on the components. 

Where an exemption from PPT is claimed on the basis that the packaging is used for the immediate packaging of human medicine, the contract should confirm this and the manufacturer will need to obtain evidence to support its claim to the exemption, such as the licence numbers of the medicines involved.

Where the manufacturer is claiming a credit because the packaging is exported, it will need to obtain and retain evidence of export. It will want to ensure that the customer is contractually obliged to provide this evidence once the goods have been exported.

Importers or purchasers

The checks undertaken should be relevant, reasonable and proportionate depending on the circumstances.

The guidance suggests that importers or purchasers of plastic packaging components containing less than 30% recycled plastic could carry out the following checks:

• requesting confirmation of the tax status of plastic packaging components from their supplier;
• getting signed documents from their supplier confirming that PPT has been properly accounted for;
• getting product specifications for the packaging components, including the weight and composition of the products;
• physically checking the weight of packaging components to their purchase order and any of the product specifications.

The guidance suggests that importers or purchasers of plastic packaging components containing 30% or more recycled plastic could carry out the following checks:

• checking that the price paid for packaging components reflects the current market value – if components are offered at a lower market value, find out the reason for the low cost;
• obtaining copies of any certifications or audits that have been conducted on suppliers, or the re-processors of recycled plastic;
• conducting physical inspections or audits on their packaging supply chain to prove information given by suppliers or customers;
• checking details provided against other sources, such as supplier and customer websites, product specifications, sales and marketing information.

Although contractual protection and written confirmations should be obtained, it is important to note that HMRC also expects physical checks to be carried out. Examples could include inspecting the supplier product lines to ensure that they comply with the product specifications provided, and obtaining certifications from third parties as to the materials used in the components. This will be particularly important where it is claimed that PPT is not payable because the packaging contains more than 30% of recycled plastic.

If due diligence suggests that PPT is not being paid elsewhere in the supply chain

The primary obligation to pay PPT cannot be moved depending on the compliance of the members of the supply chain: if the primary obligation is not on your business, then non-payment elsewhere will not shift the obligation to your business. However, there is a potential impact on your business, which varies between scenarios.

For example, through your due diligence enquiries, you establish that your customer is the entity making the final modification to the packaging and is therefore the manufacturer for PPT purposes but is not accounting for its PPT liability. This may not be an issue if your customer is under the threshold or is using the plastic packaging for an exempt purpose and therefore does not in fact need to pay PPT on the plastic packaging. In these circumstances, there has not been a non-payment of PPT because none is due from your customer. As long as you have obtained the information you need to be comfortable that this is the case, HMRC should be satisfied that you have done sufficient due diligence.

However, if you believe from your due diligence that your customer should be paying this PPT, in addition to making sure that your due diligence records are up to date and secure, your best course of action would be to stop trading with those entities immediately, and report your findings to HMRC.

Others in the supply chain

Although not specifically mentioned in the HMRC guidance, the joint and several and secondary liability provisions extend beyond manufacturers and importers. Those potentially liable include those involved in transporting or storing products and operators of online marketplace or fulfilment businesses. These entities should also ensure contracts state that any PPT due has been paid and conduct whatever due diligence is relevant, reasonable and proportionate depending on the circumstances. The checks suggested by HMRC for importers and purchasers should be a useful starting point.

Although HMRC has yet to publish any guidance on how it will apply the rules in relation to joint and several liability notices or secondary liability notices, the circumstances for applying these notices are prescriptive and HMRC will need to follow prescribed steps carefully in order to avoid successful challenges.

There is nothing in the legislation which suggests that HMRC may only issue notices to a business that exceeds the threshold. Therefore, all businesses dealing with plastic packaging ought to be wary of PPT and complete proper due diligence, regardless of whether they meet the PPT threshold. There are many small businesses that will be unaware of these obligations and the potential consequences for them.

Record keeping

In all cases records will need to be kept of the due diligence steps taken. This is in addition to the records required to support the information submitted on PPT returns or to show that the business is not required to register for PPT. Again, physical checks of product runs and inspections or audits may be required. HMRC has issued guidance on the accounts and record keeping required.