Aggregates Tax and Devolved Taxes Administration (Scotland) Bill: business and regulatory impact assessment

Options

This assessment considers three possible options in relation to establishing a replacement for the UK Aggregates Levy in Scotland.

Option 1) Do not replace UKAL once it is disapplied in Scotland.

Option 2) Introduce a replacement tax that retains the fundamental structure of UKAL while being tailored to Scotland's needs.

Option 3) Provide for a replacement tax that takes a fundamentally different approach to the existing UKAL, redefining key concepts and introducing a different system for the administration of SAT

Option 1 - Do not replace UKAL once it is disapplied in Scotland.

The UKAL has been in operation since 2002 and currently applies in Scotland. This would therefore represent the greatest change relative to the present situation and is not a business-as-usual option.

Sectors and groups affected

• Producers of commercial aggregate
• Producers of alternatives to primary aggregate
• Users of aggregate, including in the public and private sectors.

Benefits

The direct beneficiaries of this option would be those responsible for the commercial exploitation of aggregates, who would no longer be liable to pay a tax on primary aggregate commercially exploited in Scotland. This would reduce their overall costs by (on present prices) £2 per tonne of commercially exploited aggregate.

It is expected that, in most instances, aggregate producers will pass the cost of UKAL onto their customers and that this option would therefore also result in a saving for customers. This would include a range of private and public sector customers, including local authorities.

The cost to aggregates producers of making tax returns would also be wholly removed for any current taxpayers that operate solely in Scotland, whilst it might also be reduced, though by a proportionately lower amount, for taxpayers that operate across the whole of the UK and would therefore still require to consider the UKAL. Scottish Aggregates producers who move aggregate to the rest of the UK would also still be required to account for UKAL.

No additional costs would be incurred by Scottish Government or Revenue Scotland in relation to the implementation and the collection and administration of tax.

Costs

If UKAL is disapplied in Scotland and not replaced by a devolved tax, the Scottish Block Grant Adjustment would nonetheless be increased to reflect the estimated revenues that the UK Government would no longer receive from material commercially exploited in Scotland. This would result in an immediate material reduction in the Scottish Budget.

The Scottish Fiscal Commission produced an estimate of the Scottish share of UKAL in their Economic and Fiscal Forecast (May 2023). The table below sets out the estimated Scottish share of UKAL over the next five years. This estimate indicates the potential negative impact on the Scottish Budget of this option

The Scottish Government intends that SAT will align with wider ambitions to deliver a fair, green and growing economy. In particular, the circular economy provides an opportunity to minimise our demand on primary resources and maximise the re-use, recycling and recovery of resources, rather than treating them as waste. This opportunity for Scotland would be undermined by Option 1.

In addition, research published by the Scottish Government suggests that removing UKAL would result in an increase in primary aggregate production in Scotland and a decline in the production of recycled aggregate.

The UKAL has also helped to establish a stable policy landscape which supports long-term investment decisions regarding alternatives for primary aggregates. The option not to introduce a replacement tax would result in the removal of an incentive to continue to encourage the use of recycled aggregate, wastes and other by-products instead of primary aggregate, while undermining investments opportunities in the development of new products which might in future substitute for aggregates.

Option 2) Introduce a replacement tax that retains the fundamental structure of UKAL while tailoring to Scotland's needs.

Under Option Two, an aggregates tax, similar to UKAL, would remain in place in Scotland.

Sectors and groups affected

• Producers of commercial aggregate
• Producers of alternatives to primary aggregate
• Users of aggregate, including in the public and private sectors.

Benefits

The circular economy provides an opportunity to minimise our demand on primary resources and maximise the re-use, recycling and recovery of resources, rather than treating them as waste. SAT will ensure that there continues to be a financial incentive that encourages a shift in demand from primary aggregate towards recycled aggregate, wastes and other by-products.

Retaining the fundamental structure of the UKAL provides continuity for taxpayers, enables the adoption of core legislative elements which have been tested via litigation and scrutiny, while allowing for the tax to evolve over time to ensure it continues to support the Scottish Government's circular economy objectives.

This option also allows the Scottish Government and Revenue Scotland to take a modern, digital-first and Scotland specific approach to the collection and administration of the tax, in line with the Scottish Government's Framework for Tax, and the shared commitment to work in partnership to develop and maintain an efficient and effective tax system in Scotland^[9].

Lastly, this option will also allow the Scottish Government to retain revenue from SAT. The Block Grant Adjustment amount will be updated in line with the Fiscal Framework arrangements and the outcome of ongoing discussions between the Scottish and UK Governments on the specific arrangements for SAT.

In summary, this option will (1) retain definitions developed over a long period of time with extensive engagement between the UK Government and stakeholders, (2) maintain a system that is widely understood by the industry, and (3) takes into account that UKAL has been considered and validated through litigation, including by the European courts.

Costs

Establishing a new devolved tax will entail set-up and delivery costs. These primarily relate to the following estimated Revenue Scotland costs:

Planning for and setting up a system to administer SAT - £2,345,000.Annual running costs to administer SAT - £905,000.

The UKAL Register records that there are 320 sites registered in Scotland, linked to just under 150 operators. The Scottish Government expects that the number of SAT registered operators will be broadly similar. Option two is expected to have a minimal impact on business as a similar system is already in operation and we would expect the administrative burden to be similar. Most producers will incur a one-off cost to register on Revenue Scotland's system and to adjust their systems and processes.

A small number of medium to large scale quarry operators which operate across the UK will need to register for both SAT and UKAL. The UKAL Register records that 14 operators have sites registered in both Scotland and the rest of the UK. In addition, the intended cross-border arrangements will require some aggregate producers in the rest of the UK who supply aggregate to Scotland to register for SAT.

Revenue Scotland officials have advised the Scottish Government that they will consult with industry stakeholders as part of the development of the online system and seek to provide systems that minimise administrative effort and costs.

Option 3) Provide for a replacement tax that takes a fundamentally different approach to the existing UKAL, redefining key concepts and introducing an entirely different system for the administration of SAT

Sectors and groups affected

• Producers of commercial aggregate
• Producers of alternatives to primary aggregate
• Users of aggregate, including in the public and private sectors.

Benefits

The specific benefits of this option would depend on the exact nature of any alternative system proposed. Though no detailed alternatives were proposed to the Scottish Government during the process of consultation, this would in principle provide an opportunity to reshape all aspects of aggregate taxation in Scotland and introduce an entirely distinctive system. It could include measures to restrict the commercial exploitation of aggregates in Scotland, with the aim to support wider circular economy objectives. Moreover, a fundamentally different approach might entail measures which seek to raise additional revenue from the tax.

Costs

While the specific costs of this option would depend on the exact nature of any alternative system proposed, it would potentially result in significant disruption to the aggregates industry and its customers, an increased risk of double taxation and complications to the cross-border movement of aggregate. It would also create increased scope for unintended consequences.

Aggregates make an important contribution to Scotland's economy, providing materials for housing, construction, road-building and other uses, and supporting employment, including in rural and remote areas of the country. Aggregates are also required as construction materials to support net zero ambitions, including for diversification of the energy mix. A fundamentally different approach could therefore have an adverse impact on construction costs and the wider Scottish economy.

Part 2 Provisions: Devolved Tax Administration

For the provisions in Part 2 of the Bill, the Scottish Government considered two options:

Option 1) Include the provisions in the Bill

Option 2) Do not include the provisions in the Bill and focus solely on the legislation required to deliver a SAT.

Option 1) Include the provisions in the Bill

Sectors and groups affected

• Individuals and organisations which require to submit tax returns in relation to the fully devolved taxes.
• Revenue Scotland

Benefits

If introduced, the provisions in Part 2 of the Bill, and any subsequent secondary legislation, would be intended to support the efficient and effective collection of all fully devolved taxes by Revenue Scotland. The specific benefits for the tax authority of provisions related to communications with taxpayers and the use of automation would depend on the details of any relevant secondary legislation.

They would also have the intention of providing additional certainty for taxpayers, including with regard to the application of penalties for late payment of LBTT and the arrangements in place for set-off.

In relation to set-off, the Bill would bring devolved tax legislation into line with the general law of set off in Scotland, and therefore is more likely to align with public expectations.

Costs

The provisions do not change in any way the amount of tax due to be paid under any fully devolved tax or create any new obligations on taxpayers.

The nature of the changes is such that it is not possible to estimate the precise financial impact for Revenue Scotland, However, the Scottish Government estimates that the measures would be broadly neutral in terms of Revenue Scotland's costs of operation, relative to the option of maintaining the status quo. In terms of the provisions related to the use of automation and communications from Revenue Scotland to taxpayers, specific consideration would be given to any cost implications as part of the relevant consultation process for any secondary legislation.

Option 2) Do not include the provisions in the Bill and focus solely on the legislation required to deliver a SAT.

Sectors and groups affected

• Individuals and organisations which require to submit tax returns in relation to the fully devolved taxes.
• Revenue Scotland

Benefits

The benefit of this option is that it would allow for consultation to be undertaken on provisions prior to their inclusion in a Bill, providing taxpayers and interested organisations with an opportunity to comment. In relation to the provisions on communications with taxpayers and the use of automation, this might allow for more detailed proposals to be set out in primary legislation at the outset.

Without automatic set-off, taxpayers would still need to provide express permission to reallocate any credits against debits due. This gives them greater control over payments and how to settle outstanding tax debt.

Costs

Selecting this option would mean that the opportunity to improve the efficient and effective collection of all the fully devolved taxes by Revenue Scotland would not be taken, with no certainty as to when a future legislative opportunity for change would arise.

This would mean in particular that additional legislative clarity would not be provided on the application of late payment penalties, the arrangements for set-off or the legal continuity of acts by different designated officers, including in relation to summary warrants for the recovery of unpaid amounts of tax. This would have a direct bearing on tax compliance and recovery work. It might also result in a delay in progress being made in terms of future legislation relating to Revenue Scotland's communications with taxpayers or the use of automation.