Scottish Budget - Draft Budget 2017-2018 devolved taxes methodology report

Chapter 6 - Scottish Landfill Tax

Introduction

The Scottish Landfill Tax ( SLfT) was introduced in April 2015 and is a fully devolved tax. SLfT is an environmental tax whose aim is to help reduce the amount of material which ends up in landfill sites located in Scotland. For 2017-18, we propose there will be two rates of tax payable; a 'Standard Rate' of £86.10 per tonne for 'active' waste and a 'Lower Rate' of £2.70 per tonne for 'inert' waste (such as building materials). The associated tax revenues are collected by Revenue Scotland who publish the taxable landfill volumes and tax revenue statistics on a quarterly basis. ^[34]

Whilst the main policy aim is to incentivise reductions in waste volumes going to landfill, a particular feature of the tax is that a small proportion of 'gross' revenues are reserved to pay for environmental restoration projects near to landfill sites which qualify for funding under the Scottish Landfill Communities Fund ( SLCF). The remaining 'net revenues' are paid into the Scottish Consolidated Fund by Revenue Scotland and made available for public services generally.

Revenue forecasts

The SLfT forecast for 2017-18 is £149 million. Total revenues are forecast to fall in three of the four subsequent years of the forecast period and are projected to decline to £106 million by 2021-22 (a fall of 29 per cent) as detailed in Chart 15.

Chart 15: Forecast for Scottish Landfill Tax Revenue, 2017-18 to 2021-22, £ million

1. Net revenue excluding Scottish Landfill Communities Fund ( SLCF) Credits

Methodology

This section sets out the methodology which was applied to the production of revenue forecasts for Scottish Landfill Tax ( SLfT) to support the 2017-18 Draft Budget and to provide provisional forecasts for the period 2017-18 to 2021-22 and how this methodology has changed.

This methodology differs significantly from the 2016-17 methodology where the forecast was driven explicitly by two headline waste policy targets. ^[35] The former method assumed a linear time-trajectory of waste based on the policy targets. There was a consensus with the Commission that the previous methodology could be improved and that a more clearly evidence-based methodology be developed. Scottish Government has revised the methodology substantively as a result of these challenges.

A central driver of the new forecasting model is the effect of forecast growth in incineration facilities in Scotland on diverting waste from landfill.

The model takes 2016-17 as its starting point for forecasting taxable waste (Standard Rate and Lower Rate) that is sent to landfill. For the purposes of the forecast, we assume a flat underlying trajectory of both waste types over the forecast period. From this trajectory, the model subtracts the estimated increases in incinerator capacity in Scotland, adjusted to reflect average operating levels. Incineration leads to residues (ash), which are assumed to go into landfill in the same time period, with some of this residue being Standard Rate (4% of tonnage incinerated) and some being Lower Rate (15% of tonnage incinerated). This describes primarily the estimation of Standard Rate waste. The only change to Lower Rate waste over the forecast period is that it accumulates incineration residues.

The model does not incorporate the impacts of waste policy around waste prevention, recycling or the ban on biodegradable municipal waste ( BMW) going to landfill from January 2021 due to limitations in the evidence to predict their trajectories. The model considers Scottish incineration capacity only and does not estimate the future scope for residual waste export markets (either to RUK or overseas) or the impact of the expected increase in residual waste pre-treatment capacity. All of these factors may divert waste from landfill and this is discussed below as a risk to the forecast.

Waste modelling assumptions: baseline tonnage

Our central forecast is based on estimated Scottish taxable tonnages at 2016-17. This is calculated from the existing outturn data for 2016-17 and the pattern of 2015-16 taxable tonnages in Scotland. We estimate the full year Standard Rate and Lower Rate tonnage using the quarterly shares shown in the Revenue Scotland data for 2015-16.

We assume that the underlying level of taxable waste - before consideration of incinerator effects - is flat over the forecast period. That is, we assume no additional trend reductions in taxable waste resulting from the range of other policies and incentives in place.

Waste incinerator capacity in Scotland

We have worked closely with Zero Waste Scotland, SEPA and an external consultant to set out our best estimates to the Commission of dates when incinerator capacity will come on stream. We have incorporated these capacity and timing data into the model.

Chart 16 summarises, the downward forecast trajectory for Standard Rate waste volume from 1.86 million tonnes in 2015-16 to 1.1 million tonnes in 2021-22; the much flatter trajectory for Lower Rate waste volume; and also the cumulative additional incineration capacity which is projected to build from 67,500 tonnes in 2017-18 to 860,000 tonnes in 2021-22. Chart 15 provides the picture of the waste modelling assumptions that drive the revenue forecasts for 2017-18 to 2021-22.

Chart 16: Projected taxable waste volumes and forecast incinerator capacity, 2015-16 to 2021-22 (tonnes)

Tax rates

The Scottish Government set the 2015-16 and 2016-17 SLfT rates to mirror UK rates in order to address concerns over potential "waste tourism" (creating a financial incentive to dispose of landfill in neighbouring countries with different landfill tax regimes and rates). The Scottish Government proposes that rates of SLfT for 2017-18 should continue to mirror UK rates, as set out in the Draft Budget. For modelling purposes, we also assume that Scottish rates will mirror those set at the UK level for 2018-19, which have already been announced by UK Government. For the rest of the forecasting period, tax rates are increased using RPI inflation projections, in line with the stated policy of the UK Government and using Office of Budget Responsibility ( OBR) RPI forecasts released at the time of the UKG Autumn Statement. ^[36] Table 25 shows the assumed landfill tax rates for the forecast period.

Table 25: Scottish Landfill Tax rates per tonne of material, 2016-17 to 2021-22

	2016-17 Actual	2017-18 Proposed	2018-19 Assumed	2019-20 Assumed	2020-21 Assumed	2021-22 Assumed
Standard Rate	£84.40	£86.10	£88.95	£92.10	£95.00	£98.00
Lower rate	£2.65	£2.70	£2.80	£2.90	£3.00	£3.10

Tax credits for contributions to the Scottish Landfill Communities Fund ( SLCF)

The 'gross' tax receipt projections are adjusted to take account of tax credits due in respect of payments to the Scottish Landfill Communities Fund ( SLCF). The credit rate is the maximum proportion of Landfill Tax liability that an operator can offset by making payments into SLCF-approved projects. The Scottish Government proposes to maintain the 2016-17 SLCF credit rate of 5.6% for 2017-18. This credit rate is approximately one-third higher than the comparable UK credit rate of 4.2% for 2017-18.

We have assumed, for modelling purposes, that the SLCF credit rate is held constant for the rest of the forecast period and have also assumed full uptake of 5.6% by operators as shown in Table 26.

Table 26: Actual/proposed/assumed SLCF tax credit rates used in modelling, 2016-17 to 2021-22

	2016-17 Actual	2017-18 Proposed	2018-19 Assumed	2019-20 Assumed	2020-21 Assumed	2021-22 Assumed
SLCF Tax Credit Rate	5.6%	5.6%	5.6%	5.6%	5.6%	5.6%

Evolution of the SLfT forecasts

Throughout the scrutiny process involving the SFC, a number of changes have been made to the SLfT forecast methodology of 2016-17. These have been outlined above with the central driver of the new forecasting model being the effect of forecast growth in incineration facilities in Scotland on diverting waste from landfill. In addition, the release of a further three quarters of Scottish landfill volume and tax data from Revenue Scotland has allowed the new forecasts to be better informed by a longer series of Scottish outturn data.

Table 27 shows how the SLFT forecasts have evolved from Draft Budget 2016-17 to Draft Budget 2017-18.

Table 27: Comparison of five-year forecasts in Draft Budget 2017-18 and Draft Budget 2016-17, £ million

	2016-17	2017-18	2018-19	2019-20	2020-21	2021-22
Draft Budget 2017-18		149	118	109	112	106
Draft Budget 2016-17	133	123	114	104	94
Change		+25	+4	+5	+19

The significant factor in reconciling the two forecast series is the fundamental change to the methodology that took place for production of this year's five year forecast. This change to methodology is set out above. Table 27 shows that the biggest change for an individual year's forecast is seen in 2017-18 where the forecast has increased by £25m. The two sets of forecasts are closer over 2018-19 and 2019-20, and then diverge in 2020-21.

Forecast risks and sensitivities

Having set out the waste modelling and financial assumptions, there are also a number of potential risks and sensitivities to the accuracy of the revenue forecasts to consider.

Delays to incinerators coming on stream

As the model is primarily based on our best estimate of new incineration capacity coming on stream, the potential for delays in such large infrastructure projects is an upside risk to the forecast. This risk is mitigated to an extent by the fact that three of the five new incinerators expected to start operating within the forecast period also have some form of on-site pre-processing which is less vulnerable to delay and could potentially begin operating before the incinerator is commissioned. We tested the sensitivity to a 12 month delay (based on experience of similar infrastructure in England and Wales). Revenues over the full forecast period are 11% greater than forecast.

Additional recycling and pre-processing capacity comes on stream

A second significant risk to the accuracy of the forecast trajectory is that landfilling of standard rated waste is reduced through a combination of two factors which do not form part of the modelling:

a) further additional diversions from landfill towards recycling due to improvements in local authority collections and changes in household and business behaviours;

b) further additional waste pre-processing capacity diverting more materials towards recycling and for possible incineration abroad.

The ban on biodegradable municipal waste ( BMW)

The ban on BMW will come into effect in January 2021. As noted, in developing the forecast we have not modelled the effect of the ban on BMW going to landfill. This is due to limitations in the evidence to underpin estimates of the effects of the ban. However, we have accounted for this as a sensitivity test which suggests it could reduce total revenues over the 5-year forecast period by as much as 11 per cent. This reduction occurs in the final two years of the forecast from (2020-21 and 2021-22).

Scottish Fiscal Commission view of the forecast

The final SLfT forecast, published as part of the Draft Budget 2017-18, is set out in Chart 15 above. The Commission has endorsed the final forecast as reasonable. Further details on their views together with additional analysis and commentary are set out in the Commission's Final Report.