HMRC Consultation Landfill Tax: improving clarity and certainty for taxpayers Response by the Chartered Institute of Taxation

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HMRC Consultation Landfill Tax: improving clarity and certainty for taxpayers Response by the Chartered Institute of Taxation 1 Introduction 1.

1 HMRC Consultation Landfill Tax: improving clarity and certainty for taxpayers Response by the Chartered Institute of Taxation 1 Introduction 1.1 The Chartered Institute of Taxation (CIOT) presents its response to the HM Revenue and Customs Consultation Document on Landfill Tax: improving clarity and certainty for taxpayers, published on 26 May 2016 at ill_tax-improving_clarity_certainty_for_taxpayers.pdf. 1.2 We believe for environmental taxation to be fully effective in changing behaviour, it is necessary to have clear objectives of what an environmental tax is intended to do. We have previously raised concern that there is a lack of clarity around the direction of general environmental tax policy. For this reason, we call on the Government to put in place an Environmental Tax Framework, or road map. 2 Executive summary 2.1 We fully support HMRC s commitment to provide clarity and certainty in this area. 2.2 Whilst this approach is a step in the right direction and could make the application of Landfill Tax (LFT) rules simpler, as this proposal currently stands we are concerned that it does not provide the level of clarity and certainty required by all stakeholders. 2.3 By using solely the current list of non-taxable activities to create specific exemptions, we would expect the main areas of uncertainty to remain and challenges / litigation may continue. More precise drafting of the exceptions is needed if certainty is to be improved, alongside flexibility to extend or amend those exemptions if such a need arises.

2 2.4 We suggest that, in addition to the specific exemptions proposed, the scope of the tax as set out in Finance Act 1996 s40(2) and related sections are reviewed to ensure that all material discarded to landfill is captured, subject to it qualifying for exemption or other relief. 2.5 In relation to determining the liability of mixed loads, we would like to see specific criteria clarifying the use of the term small in order to provide greater certainty for taxpayers and HMRC. Those criteria may need to differ depending upon the nature of the load (eg hazardous v non-hazardous). 2.6 We would suggest exploring greater alignment with environmental regulation, the environment agency and accepted Industry terminology where possible, to mitigate the compliance burden and ensure consistency. This is particularly relevant when dealing with hazardous waste where it seems logical for fiscal rules to cross refer to the relevant regulators in determining what is or is not hazardous. 2.7 With the devolution of LFT to Scotland and planned devolution to Wales, any proposals should consider the impact of changes on the UK s landfill tax system as a whole in order to mitigate any unintended consequences eg the risk of waste tourism where disposals may be diverted across borders to a more generous tax regime. 2.8 Any changes made to the LFT exemptions should be consistent with the environmental logic of the tax. After all, LFT is an environmental tax and should not seek to tax environmentally friendly activities. 3 Q1: Do you agree that the proposed changes will provide greater certainty than the current legislative approach? 3.1 We agree that this proposal is a step in the right direction. By treating all waste disposed of to landfill as liable to LFT, unless expressly exempt, is a positive move that could make the determination of liability simpler than the current rules. 3.2 The measures and guidance introduced in 2009 following the Waste Recycling Group Limited [2008] EWCA Civ 849 litigation had been expected by affected taxpayers to be temporary measures pending the outcome of the 2009 consultation: Modernising landfill tax legislation. However, that consultation essentially left both the scope of the tax and the lower rating qualification unchanged and contributed to the period of uncertainty that has been in place to this day. 3.3 A concern which does not appear to be a focus of the consultation is around the scope of the tax as set out in Finance Act 1996 s40(2). The main source of uncertainty over the last several years derives from the interpretation of disposal of material as waste (s40(2)(a)) and the related Court of Appeal judgement in WRG. 3.4 In order for reform of the scope of the tax to be thorough and effective, we recommend the wording of s40 be reviewed along with supporting definitions. In particular, s64 which defines s40(2)(a) and requires the disposal to be with the intention of discarding. Any review should, we suggest, also bear in mind the purpose of the tax and be consistent with environmental objectives. 3.5 Regardless of the overarching scope, if the proposal is simply to adopt the current list of non-taxable activities (Column D of Excise Notice Landfill Tax LFT1) to create the list of exemptions, we do not believe this will provide the level of certainty P/tech/subsfinal/ITX/2016 2

3 required by all stakeholders. It follows that challenges leading to litigation may continue. 3.6 To improve certainty, we recommend more precise drafting of the exemptions, together with further consideration of the need to include other (non-taxable) activities that take place on-site. These exemptions should reflect the environmental logic of the tax. 3.7 Examples might include exemption for site restoration work by the environmental agencies and local authorities that may arise from work to clear and restore sites as a result of illegal dumping or the insolvency of a landfill site operator. Also on-site engineering activities such as permanent engineering and capping. 3.8 Some of the proposed exemptions may not fit in with landfill site practicalities. See comments to Question 2 below. 4 Q2: Are any of the non-taxable activities in Annex A unclear, or open to interpretation? Please specify, along with any suggestions that would provide greater clarity. 4.1 In general terms, we would like to see greater alignment with the fiscal rules and definitions used within environmental regulations and generally accepted definitions within the waste sector. This would help to increase clarity and mitigate the compliance burden. 4.2 If it is intended that the examples currently in Annex A are to be the only exemptions (other than those currently legislated for), we are concerned that existing difficulties in interpretation will remain, and confusion for taxpayers will continue. 4.3 Those areas requiring further clarity include: 4.4 Word definitions: If the wording of Annex A examples is retained then clear definitions of precisely what is meant by certain words and phrases will be required. Some examples include: engineering/engineered features prepared and finished function in relation to the landfill site as a whole It is also recommended that any subjective wording currently proposed, eg may, likely etc. is replaced to provide specific direction. 4.5 Cell bunds (item 4): the current guidance does not reflect the definition or usage of that term in practice by site operators and the Environment Agency. The current Prescribed Activities Order defines cell bund as a structure within the disposal area which separates units of waste and this is essentially the wording in the Annex A example. It is our understanding that a true cell bund is a structure dealing with leachate containment and not covering specific engineered structures that may be extensive and needed to physically separate containment cells or division of material within a containment cell. 4.6 Item 4 also seeks to restrict exemption to cell bunds constructed of mineral material and on the edge of the containment site. The classification of cell bund is P/tech/subsfinal/ITX/2016 3

4 questionable as noted above and regardless may be required within the site and may be constructed of other suitable material. Further clarification is recommended. 4.7 The proposed list of activities appears to suggest that a landfill site is a static construction not changing over time. Landfill sites evolve over time and we understand that features such as roads, hard standing, and indeed screening bunds may well develop over the life of the site. Requirements for these to be in place at commencement of operations and/or over the whole life of the site are not consistent with site operations in practice. There may well be other examples of these but those involved in the industry will be better placed to provide detail. 4.8 The current rules for materials used in site restoration (item 8) depend upon whether such use has been notified to HMRC or not. We find this distinction arbitrary and would suggest that a more consistent approach is that where such material is used for site restoration it is exempt from LFT. 5 Q3: Do you foresee any practical difficulties with the proposed changes? If so, what are they and how could they be overcome? 5.1 As reflected in responses to question 2 above, use of the Annex A examples and wording alone may contribute to continuing uncertainty and be out of line with waste operational practices. If the proposal merely replicates the distinction between what are currently taxable and not taxable activities in the existing Notice LFT1, we believe that the current climate of uncertainty and challenge will remain. Effectively nothing will have changed. 5.2 The use of lists of exceptions within legislation brings the challenge of keeping it up to date and relevant. As technologies and practices evolve, the lists need to similarly evolve otherwise uncertainty and challenge will continue. A practical challenge will be to keep the legislation in line with what is relevant to the sector and the aims of the tax. 5.3 Given the regulation already in place governing the waste industry, it seems logical to align common definitions where possible to fiscal rules in order to keep consistency and mitigate the burden of compliance. For example the current disputes caused by interpretation of fluff and top fluff/regulation layer may have been alleviated on either side by recognition of how such matters are dealt with or defined in environmental regulation. 5.4 Our members also report that arriving at a decision on liability can be difficult. We are told by members that HMRC are generally happy to talk about issues arising but that obtaining a meaningful decision in a reasonable timescale can be challenging. There is a feeling that recent litigation has led to a reluctance on HMRC s part to commit to making decisions. We would like to understand better why decisions are not forthcoming. Is better internal guidance needed? Could better use be made of Clearance applications? We would be happy to work with HMRC in this regard. 5.5 There is a concern amongst members about the availability, recruitment and retention of experienced LFT staff within HMRC. We are told that gaining access to relevant experience is becoming more difficult. 5.6 With the devolution of LFT to Scotland and planned devolution to Wales, any proposals should consider the impact of changes on the UK s landfill tax system as a P/tech/subsfinal/ITX/2016 4

5 whole in order to mitigate any unintended consequences eg the risk of waste tourism where an incentive might be created for disposals to be diverted across borders to a more generous tax regime. 6 Q4: We have identified incinerator bottom ash and furnace slag as potentially hazardous and yet they may be subject to the lower rate of tax. Are you aware of any other circumstances where you believe that hazardous waste falls within the scope of the Qualifying Material Order and is liable for the lower rate of Landfill Tax? 6.1 We understand that continued uncertainty around the classification of mixed loads may lead to hazardous materials attracting the lower rate of LFT. 6.2 Currently, a mixed load can be treated as lower rated if it contains predominately lower rated material and only a small amount of standard rated material. However if the standard rated material is classified as hazardous then it cannot be considered small and the whole load is to be standard rated. We are of the view that the current approach does not provide the clarity needed for all stakeholders. 6.3 There is no legislative definition of small and guidance (para 7.3 of Notice LFT 1) was amended recently and given the force of law in an attempt to address this ambiguity. 6.4 However, our members report that the uncertainty continues. The term small is neither qualitative nor quantitative and taxpayers are required to make a subjective decision (at the direction of HMRC) based on loosely defined guidance. 6.5 Where subjectivity exists, there will be differences of interpretation as in the case Cleanaway Limited (L000017). The Tribunal were required to decide what is meant by the term small quantity in a situation where HMRC (Customs & Excise) took one view, the Appellant took another and the Tribunal decided somewhere between the two. 6.6 For simplicity and clarity, we would like to see clearer, objective criteria that will enable taxpayers to determine the liability of mixed loads more effectively and accurately; providing greater certainty for both taxpayers and HMRC alike. Such criteria may need to vary depending upon the size of the load and its contents (eg hazardous v non-hazardous). 6.7 This may include greater alignment with the Environment Agency interpretations on what is hazardous. We feel it fits with the objectives of the tax that if waste is considered hazardous it should suffer the tax consequences. 6.8 Our comments to Question 6 below are also relevant here. 7 Q5: Are you able to provide any information which would assist us in quantifying how much hazardous waste falls within the Qualifying Material Order, and attracts the lower rate of Landfill Tax? 7.1 We are not able to answer this question. P/tech/subsfinal/ITX/2016 5

6 8 Q6: What do you think of any waste material listed in the Qualifying Material Order that is also hazardous attracting the lower rate of Landfill Tax? 8.1 We do not typically comment on rates as such, but feel it is appropriate where the discussion is around the objectives of the tax, save to say that where waste is defined as hazardous it should be treated as such and taxed accordingly. 8.2 We note that environmental regulations already provide for the collection of extensive data about the nature and quantities of waste and suggest that greater alignment with such regulation and the environment agency would ensure greater consistency and easier classification. 8.3 The aim of this would be to mitigate the compliance burden for both taxpayers and HMRC; improve clarity and facilitate the effective and accurate operation of the tax. 9 Q7: Do you have any information that could inform the Impact Assessment? 9.1 We are unable to answer this question. 10 Acknowledgement of submission 10.1 We would be grateful if you could acknowledge safe receipt of this submission, and ensure that the Chartered Institute of Taxation is included in the List of Respondents when any outcome of the consultation is published. 11 The Chartered Institute of Taxation 11.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 17,600 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 18 August 2016 P/tech/subsfinal/ITX/2016 6

Scottish Landfill Tax A Consultation on Subordinate Legislation Response by the Chartered Institute of Taxation

Scottish Landfill Tax A Consultation on Subordinate Legislation Response by the Chartered Institute of Taxation 1 Introduction 1.1 We have previously commented on the Scottish Government s consultation