UK aggregates levy: construction by-product exemption to be considered

However, the government will consider further a suggestion made by Pinsent Masons for a general and flexible exemption for aggregate incidentally extracted as part of a construction project, it has confirmed in a response to a consultation (16-page / 272KB PDF) on the treatment of aggregate removed during construction works.

The consultation, which was launched in March 2021, invited views on six exemptions and exclusions from aggregates levy relating to aggregate removed during construction work. It proposed narrowing the exemption where borrow pits are used. It also proposed a new exemption for by-product aggregate arising unavoidably when laying underground utility pipes.

The change, which taxes aggregate returned to the land where it was won, will increase costs for many infrastructure projects, making it important that aggregates levy is considered up front. For example, a project involving the removal of one million tonnes of aggregate from a borrow pit will add a £2 million aggregates levy charge to the project cost.

Although it is not clear when the change will come into effect, infrastructure projects tend to have a long lifespan and so a future removal of the exemption may impact on current projects.

What is aggregates levy?

Aggregates levy is a UK tax on the commercial exploitation of rock, sand and gravel. It was introduced as an environmental tax to encourage the recycling of aggregate. However, in addition to applying to the quarrying industry, it often applies when aggregate is extracted in the course of an infrastructure project. There are exemptions but they are narrowly drawn.

There are considerable tensions over the scope and application of aggregates levy between the aggregates industry and those undertaking infrastructure projects. Infrastructure companies and utility companies want to keep down the cost of their projects and therefore want to minimise their exposure to aggregates levy. On the other hand, those in the aggregates industry are keen to ensure that construction companies do not get a competitive advantage by being able to use their own aggregate free of the levy instead of purchasing aggregate from a third party which would be subject to the levy. These different vested interests came through on the consultation responses, with respondents being split into two main camps on many of the substantial questions. 

Borrow pits

Aggregate that is returned, unmixed with anything except water, to the land at the site where it was won is not subject to aggregates levy because the legislation currently provides that it is not ‘commercially exploited’. This exclusion can currently apply to borrow pit aggregate used on a construction site when both the borrow pit and the area of construction are considered to be a single, large site. A borrow pit is a temporary site used to extract aggregate for a specific purpose, which is generally restored when no longer needed.

The government has confirmed in the consultation response that it is going ahead with its proposal to limit the exclusion so that it only applies where aggregate is returned to the land at the site where it was won for a purpose connected to the winning of the aggregate. This would mean that using unmixed aggregate from a quarry to construct bunds and haul roads at that quarry would not attract the levy as these are purposes connected to the winning of the aggregate.

However, using unmixed aggregate from a borrow pit to construct roads, railways and other infrastructure would not be exempt from the levy because it would not involve using the aggregate for a purpose connected to the winning of aggregate. Borrow pits are used on many large infrastructure projects, so this change will increase the costs of these projects.

In the consultation response document, the government said that although some respondents had argued that the proposal might encourage road haulage of aggregate and worsen the environmental impacts of a project overall, the government believes planning authorities “will continue to scrutinise these impacts as part of the planning application process and make appropriate decisions in each case”. It dismissed a suggestion that HMRC should become a statutory consultee on planning applications for developments likely to generate demand for significant amounts of aggregate on the basis that this was not an appropriate role for HMRC as a tax authority.

It is not clear when the change will come into effect as the consultation document says that draft legislation will be published for consultation ahead of its inclusion in a future Finance Bill – which suggests that it will not be in the Finance Bill 2022, which has already been published.

Construction by-product exemption

Pinsent Masons responded to the consultation on the aggregates levy exemptions and suggested the government should consider replacing the specific exemptions for each circumstance where aggregate was extracted as a by-product of construction works with a general one for aggregate incidentally extracted as part of a construction project. This approach would allow flexible application of the underlying principle to the construction industry, adapting with the industry and reducing arbitrary exclusions.

The response document says that the government considers there is merit in this idea and is going to consider it further and consult informally.

There is currently an exemption for aggregate removed by utility operators carrying out works below the street under specified legislation. However, this is narrowly drafted and where pipes are laid between a road and a construction site or across agricultural land or parkland there is no general exemption for aggregate removed. The consultation proposed a new general exemption for aggregate necessarily arising when laying all underground utility pipes, as proposed by water and wastewater companies.

The government agrees that it would be consistent with the environmental purpose of aggregates levy to exempt unavoidable by-product aggregate from laying underground utility pipes. However, it is going to hold off introducing a new exemption until it has considered whether a new general exemption for aggregate extracted as a by-product of construction works is workable, as this would cover laying utility pipes.

A general construction exemption would be a welcome simplification of the rules and should mean that new types of construction project do not fall foul of the exemption simply because they were not contemplated when the original exemptions were drafted, as happens with the current system.

Co-written by Sam Wardleworth of Pinsent Masons