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 entitled A landfill tax for Scotland and on the later consultation on The Landfill Tax (Scotland) Bill as well as other tax consultations. 1.2 In our responses to consultations, we have consistently emphasised that Scotland should adopt legislation that supports its particular aims and objectives and this may require departure from the UK tax model. In relation to landfill tax, this translates into how to adopt legislation that supports Scotland s zero-waste agenda while at the same time recognising the needs of operators who will not want major systems change. 1.3 Nevertheless it must be recognised that change will occur because there are going to be two and possibly more landfill tax systems operating across the current territory of the UK. The question that arises is what changes should take place at inception of the Scottish system and what changes can conveniently be postponed to a later date. 1.4 In this regard, we note that if there is change in 2015 and then there needs to be further change later, there will be more than one transitional period. 2 Executive summary 2.1 We are disappointed that the regulations seek to perpetuate the illogical proposition that materials used on landfill sites, for example for temporary cover and the construction of roads, should be taxed regardless of the comments of the Courts in Parkwood and Waste Recycling Group (see 4 below). 2.2 Similarly, we believe that if change is going to be made to better support Scotland s environmental objectives, it does not seem sensible to simply follow UK rates. We do appreciate that in the short term this may be easier for operators (who need to be consulted) (see 3 below).
2.3 We have consistently pointed out that weight is a poor proxy for the impact of waste on the environment. Accordingly, we do not agree with proposals to eliminate the discount for water (see 6 below). 2.4 Overall, we are concerned that the broad policy of following what has been done in relation to the existing landfill tax raises questions as to whether the devolution of the tax will have any impact at all on environmental policy. 2.5 For ease of reference, we have repeated the questions in the consultation document in the paragraphs of our response below. Some questions can only be answered by operators and we have not responded to them. 3 Tax rates and qualifying materials 3.1 Question 1: Do you agree with the list of materials to be subject to the lower rate of tax, as set out in the draft Qualifying Materials Order? 3.2 Scotland intends to adopt the same rates structure as the UK system. This entails the setting of two positive rates and the application of an exemption for certain other waste. Initially, it is intended to adopt rates no lower than those set for the rest of the UK. 3.3 We agree with the Scottish approach to the setting of the lower rate, which does not refer to materials as being inert but rather sets out the criteria for waste that will be subject to the lower rate. The criteria are set out in para 2.7 of the consultation document as follows Non-hazardous Low potential for greenhouse gas emissions Low polluting potential in the landfill environment 3.4 We note that the draft Qualifying Materials Order does seek to address some of the issues currently creating confusion over lower rating treatment, in that elements of the existing consultation on lower rating guidance are built in. Current UK proposals to introduce mandatory testing for fines are not replicated, and this is one area that may remain subject to query and challenge. 3.5 In our comment on the Landfill Tax (Scotland) Bill, we welcomed the fact that the Bill provided for the setting of additional rates to reflect the relative damage caused by different types of waste. We remain of the view that tax rates should reflect the degree of damage caused by particular types of waste, its impact on the possible future reuse of land used for landfill and the ability to recycle it. In this connection, we have previously noted that because EU environmental regulations already provide for the collection of extensive data about the nature and quantities of waste, a system of rates linked to records that already have to be maintained should be the ultimate aim of the tax. 3.6 We note that in SEPA s evidence to the Finance Committee on landfill tax, it comments SEPA already receives submissions of data and payment of fees from landfill site operators. The data returns relate to the types & quantities of waste that sites have received. There is a natural synergy between this data collection P/tech/subsfinal/STC/2014 2
role and the administration of the landfill tax returns. This reinforces our view that it should be possible to more closely align records needed for landfill tax with those required for environmental regulation. Indeed, SEPA comments at para 8 of its response that the standard rate might be imposed on what would otherwise be waste subject to the reduced rate to encourage its recycling. 3.7 We agree that if waste is capable of recovery or recycling, the rates should be set to encourage that to take place regardless of whether or not the criteria referred to in para 2.7 of the consultation document are met but it may be that this should not be at the standard rate. 4 Prescribed activities on landfill sites 4.1 Question 2: Do you agree with the list of prescribed landfill site activities that are to be taxable under Scottish Landfill Tax? 4.2 The consultation document notes 3.2 The Scottish Government is of the view that all material entering a landfill site, provided it is not used in the final restoration of the site or stored in a non-disposal area, should be subject to the tax. 3.3 The Order is necessary to tax material received on a landfill site that is put to a temporary use (for example, for the daily coverage of sites required under environmental regulation, and construction of on-site haul roads). 4.3 The proposal implements the same legislation in the UK version of the tax, which was inserted to respond to the Court of Appeal s judgments against HMRC in the cases of Parkwood Landfill v Customs & Excise 1 and HMRC v Waste Recycling Group Limited 2 (WRG). 4.4 It is clear from the Court s judgments that the judges in the Court of Appeal and in the Court below did not consider that such materials comprised materials disposed of as waste. It is therefore unclear to us now, as it was when the UK introduced a similar regulation, why materials used to prevent the undesirable impact of landfill operations (eg airborne particles, gases etc), or necessary to fulfil landfill permit conditions should be taxed. 4.5 We would suggest that the extent, if at all, to which such materials should be taxed should be reviewed. For example it is difficult to see why building a road inside a landfill site should be regarded as a disposal of waste when the same activity done outside a site would not be. The same would be true for the building of a hard standing area. 4.6 The draft Scottish legislation on prescribed activities mirrors that currently in place in the UK. As noted, when introduced in 2009 in the UK, this was a reaction to the WRG judgment and was believed to be a temporary measure pending review and overhaul of the existing legislation. Nevertheless it remains in place and lack of guidance on interpretation has led to ongoing difficulty for site operators and indeed ongoing 1 [2002] EWCA Civ 1707 2 [2008] EWCA Civ 849 P/tech/subsfinal/STC/2014 3
litigation over the scope of the order. In our view, the use of materials should be considered in light of the precedent case law. 5 Tax exemption for site restoration 5.1 Question 3: Do you agree with the proposal to exempt the Scottish Environment Protection Agency and local authorities from Scottish Landfill Tax that may arise from work to clear and restore sites as a result of illegal dumping or the insolvency of a landfill site operator? 5.2 We agree with this proposal. 6 Weighing waste 6.1 Question 4: Do you agree that water should not be discounted in the weighing process when determining liability for Scottish Landfill Tax? 6.2 In our response to the consultation on the Bill, we commented that to fully achieve the Government s zero-waste objectives, what should be taxed is not the quantity of waste but the extent to which land that could be better used is taken out of normal activity to dispose of waste. 6.3 That suggests that, as mooted in the UK Government s consultation entitled Modernising Landfill Tax, a more appropriate tax base might be volume rather than weight. We recognise the pragmatic reasons why weight has been chosen to measure the tax base but in light of our view that it is the impact of waste that needs to be taxed, have some difficulty in seeing why water, subject to conditions, should not be discounted. 6.4 In this connection, we received comment that some waste cannot be transported on its own and has to be transported in a liquid. Since water may significantly increase the weight of waste entering a site even though it is eventually removed, we do not think it is appropriate to remove an accepted means of measuring the actual waste that is sent to landfill. We would accept that this should be provided that the water is subsequently removed in an acceptable way, ie complies with environmental regulations. 6.5 The consultation document suggests that the discount is not needed because of restrictions on liquid waste. However, if this is indeed the case, then it seems unlikely that the existence of the discount would represent a process that can be used for significant abuse or evasion. Further, we have no doubt that if the discount calculation is complex, operators may well take a pragmatic view and not apply a discount to which they are entitled if the amounts are immaterial. 6.6 The disproportionate effect of not discounting water may be seen by a comparison of two types of waste. Plastic bags are very light in weight but take a long time to degrade and are potentially more damaging to the environment, hence the recent move to tax the provision of them by retailers. However, it may be necessary to add water to a waste such as ash to P/tech/subsfinal/STC/2014 4
transport it without allowing it to escape into the atmosphere. It would follow that such waste might be subject to a higher amount of tax notwithstanding that it is less damaging to the environment and the water is recovered as part of the disposal process. 7 Credit bad debt 7.1 Question 5: Do you agree with the Scottish Government s approach to allowing credit for bad debt? 7.2 In general we agree with the principles behind this legislation but we have some reservations about the detail. 7.3 First, the consultation document indicates that there are 52 operators in Scotland. We do not know the extent to which they have connected parties that deposit waste with them but we would suggest that it is likely to be very few. We do not think it is proportionate to deny relief solely because a person is connected without there being any evidence of fraud or abuse. Accordingly, we would remove the reference to connected parties. 7.4 Second, as with the UK legislation it is proposed to use the term written off (Clause 18). When bad debt relief was introduced in relation to VAT, this same terminology was used and was then subsequently used in relation to relief for other indirect taxes. 7.5 Initially, Customs & Excise (as they were then) insisted that bad debt relief was only available if the debt was written off ie had been charged against the profit and loss account of a business the normal meaning of the term. However, in light of article 90 of the Principal VAT Directive it was accepted that the relief is for non-payment of the debt rather than because the debt is regarded as irrecoverable. 7.6 We consider that this relief should be based solely on non-payment of a debt for the specified period and that accordingly the reference to the requirement that the debt be written off removed. All that should be required is that there should be a record showing The amount of the unpaid debt showing how it was comprised; When the payment was first due; The amount of any payments made subsequently (to allow clawback of the relief). Anything else relies on subjective criteria rather than the perfectly objective 12 month term specified in the legislation. We considered whether or not any anti-avoidance legislation is required but in light of the wide scope of the general anti-avoidance provision that will be in place when the tax is implemented, we are not sure that that is necessary. 7.7 Regulation 25(3) requires the set off of mutual debts. In doing so, it refers to debts that can be set off. We believe that this provision is highly impractical given the way businesses organise their affairs. Further, if there are continuous purchase transactions with the debtor it may be that the value of the amount that can theoretically be set off may vary wildly. We also doubt whether there will be a sufficient volume of mutual trading transactions with landfill tax operators to justify such a measure (or that in 24(4)). P/tech/subsfinal/STC/2014 5
8 Scottish Landfill Communities Fund 8.1 Question 6: Do you agree with the Scottish Government s proposed distribution mechanism for the Scottish Landfill Communities Fund? 8.2 The application of monies received from taxation is not strictly speaking a tax issue. We agree that administration costs should be minimised subject to the there being sufficient control to ensure that funds directed at projects are used as intended. 8.3 Question 7: Do you agree with the proposed objectives of the Scottish Landfill Communities Fund? 8.4 This concerns how monies received are applied and is not strictly a tax issue. However, in general we agree that given the purpose of the tax, the fund should be applied to further prevention of waste, recycling and reuse. 8.5 Question 8: Do you agree that that the proximity rule of 10 miles should be extended to waste transfer stations? Again this is not a tax issue but we do not see any objection to it. 9 Accounting and invoicing periods 9.1 Question 9: Do you agree that the 14 day period provision in section 26 of the Landfill Tax (Scotland) Act 2014 should be removed to align the environmental and tax return periods? 9.2 We have not commented on this matter because it is essentially an issue for those operating sites who will be better able to decide its impact on them. 10 Draft Regulations 10.1 Question 10: Do you have any other comments on the draft regulations? 10.2 We have no further comment on the draft regulations. P/tech/subsfinal/STC/2014 6
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 17,000 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 31 July 2014 P/tech/subsfinal/STC/2014 7