The UK government has agreed to simplify the exemptions for the by-product aggregate levy, after the reform was proposed by tax law experts at Pinsent Masons.
The aggregates levy is a UK tax on the commercial exploitation of rock, sand and gravel, first introduced as an environmental tax to encourage the recycling of aggregate. In addition to applying to the quarrying industry, however, it often applies when aggregate is extracted over the course of an infrastructure project.
During a public consultation on six proposed exemptions and exclusions from the aggregates levy relating to aggregate removed during construction work, Pinsent Masons proposed replacing the specific exemptions for each circumstance where aggregate was extracted as a by-product of construction works. The law firm told the government to consider a general exemption for aggregate incidentally extracted as part of a construction project instead, arguing that it would allow flexible application of the underlying principle and reduce arbitrary exclusions.
With the publication of new draft legislation for the 2023 Finance Bill, ministers have confirmed that they will adopt Pinsent Masons’ proposal. The measures are due to come into force from 1 April 2023. Steven Porter of Pinsent Masons said: “We are delighted that the government has decided to take forward our proposal on this area, which will be particularly welcome to construction groups.”
Steven Porter
Partner, Head of Tax Disputes and Investigations
The change will reduce the arbitrary dividing lines for construction by-products and make administration of the levy simpler and less burdensome for clients in the infrastructure industry
He added: “The previous approach required frequent revisiting as new issues developed and produced unfair results in interim periods. The change will reduce the arbitrary dividing lines for construction by-products and make administration of the levy simpler and less burdensome for clients in the infrastructure industry.”
The reform will see the removal of the four existing piecemeal exemptions for aggregates extracts as a by-product of specific types of construction work, and the creation of a new general exemption for aggregates extracted from the site of any structure, or infrastructure relating to transportation or utilities.
The exemption will apply provided the extraction of aggregates is in connection with, and necessary for, the construction, modification, maintenance or improvement of the structure or infrastructure and not for the purpose of extracting aggregates. This means that it must be a necessary by-product of the underlying construction activity. Regulations will also be amended to ensure that those that fall within this new exemption do not need to register for the aggregates levy.
Meanwhile, the government also confirmed that it will proceed with its plan to limit the existing exemption for aggregate which is extracted from ‘borrow pits’ - temporary sites used to extract aggregate for a specific purpose – before being returned, unmixed, to the same sites.
The new limited exemption will only apply to aggregates that are returned to their original site for a purpose connected with winning aggregate or other minerals, meaning that using unmixed aggregate at a quarry to construct bunds and haul roads at the same site would not attract the levy. But using unmixed aggregate from a borrow pit to construct roads, railways and other infrastructure will no longer be exempt from the levy, because their purpose is not connected to the winning of aggregate.
Sam Wardleworth of Pinsent Masons said: “This change has been introduced in response to lobbying from the aggregates industry, who argued that construction companies were able to obtain an advantage by using levy-free aggregate in their construction projects on the grounds that they were being returned to the same site unmixed. The change is not welcomed by infrastructure and construction businesses since it will increase the cost of their projects where borrow pits are utilised.”
He added: “We urge our infrastructure clients to consider this change as soon as possible. While the change is not coming in until April 2023, given the length of infrastructure projects and the potential costs that this will trigger, businesses should be factoring in the limitations on the exemption into their financial models for projects and considering their options now.”
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