Breaking New Ground? Developing a Scottish tax to replace the UK Aggregates Levy: consultation

Chapter 3: Exemptions and Reliefs

3.1 The Bill will be expected to set out, to the extent that they are considered appropriate and necessary, various exemptions and reliefs for a devolved tax.

3.2 Although their effect can in essence be the same, there are important distinctions between an exemption and a relief. In general, the availability of an exemption means that tax is not due in the first instance. By contrast, the availability of a relief means that tax which would otherwise be due does not need to be paid or can be reclaimed.

3.3 As set out in our Framework for Tax, policy appraisal ensures existing tax policies and new proposals are balanced, coherent and deliver against objectives. Our goal is to ensure decisions are based on the best evidence available and taken in the round. Amongst the key factors we take into account are affordability and value for money, particularly if tax reliefs or exemptions are being considered given that these will reduce the amount of revenue that can be collected.

3.4 Consideration of potential exemptions and reliefs is linked to the rationale for a tax and the definitions used for both aggregate and commercial exploitation. As such, and taking account of the arrangements for the UK levy, this is recognised as an area with the potential for significant complexity, which the Scottish Government expects to be a key focus of the consultation process.

3.5 Part B of this consultation seeks views on the key elements of the tax administration structure which should apply with regard to any available exemptions or reliefs.

Exemptions

3.6 The current UK levy legislation includes a large number of exemptions, which relate in broad terms to: (i) types of aggregate; (ii) the circumstances in which aggregate is "won" and (iii) the processes to which aggregates are subject. In addition, exports of aggregate from the UK are currently exempt from the UK levy. As discussed below, the provisions in the Scotland Act 2016 create a potential risk of double taxation in this regard.

3.7 Commenting on the number of exemptions, the Office of Tax Simplification questioned whether the tax might better be based on defining what is caught rather than what is excluded. It was however recognised that this may be difficult in practice.

3.8 Some of the existing exemptions are also recognised as having been contentious and subject to long running legal challenge regarding the possibility that they constituted unlawful state aid. In particular, there have been disputes about the potential for some exempted primary materials to be used as aggregates instead of materials which are taxed. These proceedings resulted in the removal of an exemption for shale used in construction in 2015, but no other changes. The UK Government has confirmed that there is no ongoing litigation in the European General Court.

3.9 The Scottish Government will consider this background context carefully in deciding on an approach to the provision of exemptions and reliefs.

3.10 We also recognise that the UK Government has proposed changes to address the concerns raised by stakeholders during the recent UK Aggregates Levy review about aspects of the treatment of aggregate removed during construction works. At the time of writing, draft legislation produced by the UK Government for Finance Bill 2022-23 sets out proposed changes which will in general: (i) restrict the existing exemption for unmixed aggregate returned to the land at its original site so that it will only apply when the return is for a purpose connected with winning aggregate or other minerals; and (ii) consolidate (and therefore replace) four existing exemptions for unavoidable by-product from specific types of construction into a single exemption.

3.11 We will engage with the UK Government in developing proposals for a Bill so as to consider the potential relevance of these proposed changes for a devolved tax. Views on these issues are however also sought in responses to this consultation.

Treatment of recycled aggregates

3.12 In line with the Scottish Government's circular economy goals, our intention is to provide an exemption from the devolved tax if aggregate has previously been used for construction purposes. Alongside the arrangements in place for Scottish Landfill Tax, this will help to ensure that they continue to be recognised as a valuable resource and re-used as much as possible.

Questions

A11 – Do you agree that recycled aggregate should be exempted from a devolved tax? Please set out commentary on your views.

Other types of exempt aggregates

3.13 In addition to recycled aggregates, we wish to consider whether there is a case for exempting other aggregates from a devolved tax.

3.14 The UK levy includes a number of exemptions which are intended to encourage the use of the relevant material as secondary aggregates where possible, as an alternative to primary aggregate. This is to reflect the UK position that the levy is intended to tax only materials that are extracted for use as bulk fill in construction.

3.15 More specifically, any material, more than half of which consists of the following substances listed below, is currently exempted from the UK levy.

• Clay, soil, vegetable or other organic matter
• Coal, lignite and slate
• Waste or by-products from an industrial combustion process or the smelting or refining of metal – such as industrial slag, pulverised fuel ash and used foundry sand
• Drill cuttings from oil exploration in UK waters and land drilling in the UK licensed under statutory powers

3.16 In addition, anything that consists completely of the following substances is exempt from the levy.

• China clay waste and ball clay waste (not including the overburden*)
• Processing waste resulting from the separation of coal, lignite or slate from other aggregate after extraction (but not any other aggregate which was extracted at the same time)
• Spoil from processing after extraction of industrial minerals*
  

*please refer to the Glossary of Terms for definitions

Exemptions for circumstances in which an aggregate is "won"

3.17 The UK Government's draft legislation outlined at 3.10 aims to amend the exemptions available in relation to ways in which an aggregate is won. The resulting exemptions are as follows:

• Aggregate necessarily arising from navigation dredging, if dredged exclusively

for the purpose of creating, restoring, improving or maintaining that watercourse.

• Unavoidable aggregate resulting from the construction or improvement, of any proposed structure or any infrastructure relating to transportation or utilities.

Exempt processes

3.18 In addition, the UK levy legislation also provides that the intended products arising from an 'exempt process' are not liable to the levy. These processes are:

• creating dimension stone, building stone, or any other type of flat stone, by intentionally cutting or otherwise shaping stone to produce one or more flat surfaces. Dimension stone is natural stone or rock that has been selected and finished (e.g., trimmed, cut, drilled, ground, or other) to specific sizes or shapes.
• The extraction of certain industrial minerals, such as: ball and china clay; potash; sodium chloride; producing lime or cement from limestone, or from limestone and anything else, including shale; and using shale for a purpose other than construction purposes.

3.19 These exemptions do not however apply in relation to the spoil, waste, off-cuts and other by-products resulting from the application of that exempt process. These are taxable, unless the material is processing waste from the extraction of industrial minerals, which is separately exempt.

Questions

A12 – Which exemptions do you consider would be required, and in keeping with the proposed scope of the Scottish replacement tax, and on what basis?

A13 – Are any exceptions to these exemptions required, and on what basis?

A14 – Aside from reducing the number of exemptions currently available in the UK levy, are there opportunities for the Scottish Government to simplify arrangements for exemptions in a devolved tax? Please set out commentary for your answer.

Reliefs

3.20 In addition to exemptions, in relation to which tax is not due, the UK levy legislation provides that a relief of the levy can be claimed under certain circumstances after it has become due. In general, these reliefs are intended to ensure that tax is not paid where aggregate is not used as bulk fill in construction.

3.21 This is a credit or repayment which only the person who commercially exploited the aggregate and accounted for the levy can claim.

3.22 Full lists of the considerable number of reliefs for industrial, agricultural and exempt processes provided for in the UK levy are set out in Part D of this consultation.

3.23 In summary, they can be divided into four broad categories:

• Aggregates used in a prescribed industrial process, such as
  • manufacturing metals, glass, plastics, fertiliser and pesticides
  • treating drinking water, oil, air or sewage
• Aggregates used in a prescribed agricultural process, such as
  • the manufacture of animal feeds or animal bedding material
  • adding to soil or growing media
• Aggregates used in an exempt process after the levy has been brought to account, such as
  • Creating any type of flat stone, producing lime or cement from limestone
  • extracting or separating certain industrial minerals from other aggregate
• Aggregates disposed of or dumped by
  • returning it, unprocessed to its originating site or a connected site
  • removing it to landfill
  • using it for beach replenishment

Questions

A15 – What reliefs do you consider would be required under a Scottish tax, and on what basis? Would the reliefs in place for the UK levy be appropriate? If so, why?

A16 – In what circumstances should the Scottish Government consider a relief rather than an exemption from the tax?

Addressing the risk of double taxation: Tax treatment of exports

3.24 The Scottish Government intends to give careful consideration to the tax treatment of exports from Scotland, in particular given the potential risk of double taxation.

3.25 At present, aggregate is fully relieved from the UK levy if it is exported from the UK in the form of aggregate, although the aggregate content of processed products is not relieved if it is exported from the UK.

3.26 As noted earlier in this consultation, at the point that a devolved tax is introduced, the provisions of Schedule 1 of the Scotland Act 2016 explicitly provide that movements from Scotland into the rest of the UK would become subject to the UK Aggregates Levy on the same basis as imports. This means that the UK levy would apply at the subsequent point of commercial exploitation.

3.27 On this basis, were the Scottish Government not to exempt exports, this would result in double taxation where that aggregate is then commercially exploited in the rest of the UK.

3.28 Notwithstanding this significant issue, the Scottish Government would welcome views on the justification or otherwise for exempting exports from Scotland from a future tax. Any proposals should take into account the taxation arrangements elsewhere in the UK. The Scottish Government will be discussing this matter with the UK Government during the consultation period.

Questions

A17 – How should the Scottish Government approach the taxation of exports from Scotland in a future tax?

A18 – Are there alternatives to an exemption which could be considered, but which may require accompanying amendments to current UK levy provisions?