Aggregates levy and how it affects construction firms

Traditionally seen as a tax on quarries, the aggregate levy is now being applied to some construction projects. Michael Hunter looks at the sectors at risk and discusses how to avoid liability

When the aggregates levy came into force on 1 April 2002, it was put forward as an environmental measure rather than a revenue-raising measure. It was to be revenue-neutral on the basis that it would finance the Sustainability Fund (to fund projects that address the environmental impacts of quarrying) and enable a cut in National Insurance rates. The levy itself was intended to reduce the demand for primary aggregates. 

Despite these stated 'green' intentions, a policy decision seems to have been taken within HM Revenue & Customs to apply the levy more widely than was initially anticipated. HMRC is now investigating a number of construction businesses with a view to collecting substantial amounts of aggregates levy. At a rate of £1.95 per tonne, the imposition of the levy can add significantly to project costs.

Who is at risk?

The potential for aggregates levy to apply may come as a surprise to many construction businesses because aggregates levy is traditionally seen as a tax on commercial quarries. In fact, HMRC may be taking advantage of the lack of in-depth knowledge in the construction sector to recover the levy in circumstances where there are robust arguments to say it does not apply.

The scope of the levy is potentially very wide: it applies where any aggregate whatsoever is removed from the site from which it is extracted, mixed with anything else, used in construction or supplied to any person. 

There are exemptions to the levy, which are intended to remove some ordinary construction-related activities from its scope. However, these have been drafted very narrowly and only cover specific activities. Therefore, it is easy for certain types of activity to fall between the gaps.  HMRC now seems to be taking advantage of this.

At present, the sectors most at risk of being approached by HMRC seem to be utilities projects and alternative energy developments. 

Looking at the utilities sector, although there are limited exemptions for aggregate extracted in connection with roadworks and for the laying of services to buildings, these exemptions would be unlikely to cover, say, the construction of ring mains. This is particularly ironic as the aggregate extracted is effectively 'recycled' aggregate (because it is a necessary by-product of a non-quarrying activity) and the levy was allegedly introduced to encourage the use of this type of material.

It is also ironic that HMRC appears to be using a 'green tax' to target renewable energy projects. In some instances, HMRC has argued that use of rock extracted from borrow pits on-site to build access roads on the site of a wind farm development is subject to the levy. This is an example of a situation where there may be strong arguments that can be used against HMRC and businesses affected by this should seek professional advice if approached.

Contractual position

In this climate, construction businesses should think carefully about where any liability to the levy is reflected in their contracts. Generally, the fairest approach would be for the employer to bear the liability as it is likely it would have been factored into the project's cost had it been identified at the outset. 

Specific provisions could be included in the contract and subcontracts to pass liability up the chain. Unfortunately, the standard form contracts do not deal with this clearly. There is an argument that, under the ICE Conditions of Contract (7th Edition), a liability could be recovered under the employer's indemnity, but it is not clear whether this is the type of liability it is really intended to cover. Similarly, the NEC3 Engineering and Construction Contract does not include any express right recovery against the employer.

Looking at the contract from an employer's perspective, it would be prudent to include provisions in the contract to require the contractor to bear the cost to the extent the liability could reasonably have been avoided or reduced (particularly if the contractor is expecting an aggregates levy indemnity from the employer).

All parties should consider including provisions to regulate how any aggregates levy challenge should be dealt with. If the employer is required to bear the cost of the levy and the contractor is assessed by HMRC, the employer will not want the contractor to just accept the cost, walk away and recharge the employer. On the other hand, the contractor will not want to incur costs in disputing the liability with HMRC, unless these costs are underwritten by the employer.

In any event, all parties to a major construction contract should consider any potential aggregates levy liability at an early stage. This will allow the parties to address any major liability to the levy in terms of pricing, decisions about where aggregates should be sourced from and what provisions to include in the contract.

Michael Hunter is a Senior Associate in the Tax group at Pinsent Masons LLP.  He has a special interest in tax issues affecting the construction industry.