Proposals announced in recent months by the Government for three new taxes will mean extra costs for businesses and their customers. These new taxes are being introduced on environmental grounds and may come into effect as early as next year. Building on existing "green" taxes, such as landfill tax, the Government now plans to introduce:
- a climate control levy on energy use
- an aggregates tax
- a pesticides tax or charge.
Full details of these new taxes have not yet been announced but the potential effects on your business should be considered now.
Climate Change Levy
The Chancellor of the Exchequer announced in his Budget speech on 9 March that he was proposing to introduce a Climate Change Levy from 2001. The Levy is only to apply to business energy users. It is expected to raise around £1.75 billion in the first full year.
The Levy is supposed to be introduced in a revenue neutral manner. There will be a general reduction of 0.5% in the rate of employer's NICs (from 12.2% to 11.7%). This will be effective from April 2001. The Chancellor also proposes to recycle some of the Levy to business by way of energy saving schemes.
The definitive rates of the Levy have not been announced. However, in a consultation document issued in March, the following rates were suggested to achieve the £1.75 billion the Chancellor is looking for.
|
Fuel |
pence/kwh |
|
Coal |
0.21 |
|
Gas |
0.21 |
|
Electricity |
0.6 |
|
Sector |
Energy Tax £M |
NIC Rebate £M |
Rebate as % of Tax |
|
Public Sector |
250 |
390 |
156 |
|
Farming |
26 |
9 |
35 |
|
Rubber |
10-11 |
3-4 |
27-40 |
|
Coatings |
3.2 |
0.8 |
25 |
|
Forging |
10 |
2 |
20 |
|
Chemicals |
175 |
25 |
14.2 |
|
Foundries |
40 |
5 |
12.5 |
|
Ceramics |
26.2 |
3 |
11.4 |
|
Glass |
20 |
2 |
10 |
|
Non Ferrous Metals |
10 |
1 |
10 |
|
China Clay |
5 |
0.3 |
6 |
|
Aluminium |
20 |
1.6 |
5.3 |
|
Paper |
60 |
2.5 |
4.2 |
|
Maltsters |
4.2 |
0.12 |
2.8 |
|
Steel |
238 |
5 |
2.1 |
|
Cement |
40 |
0.6 |
1.5 |
|
Lime |
9 |
0.14 |
1.5 |
As can be seen, whilst the public sector may do very well, many industries will see a substantial increase in their net costs. The service sector will also be hit. The Government's argument is that the Levy will encourage energy efficiency but it is clear that in many cases it will never be possible to reduce energy use sufficiently to reduce the net cost of the Levy to nil.
The proposals do recognise that energy-intensive sectors will be particularly badly hit by the Levy. There will be a system of lower rates of Levy available to certain sectors. These could substantially reduce the cost to some industries: reductions of up to 50% could be given. However, it is currently expected that only those sectors falling under the Integrated Pollution Prevention and Control (IPPC) regime will qualify. The IPPC regime typically covers heavy industry. The reduced rates will only be given by agreement with the Department of the Environment, Transport and the Regions. The DETR will determine the level of discount on a sector by sector basis. In addition, it will be necessary for individual businesses to reach separate agreements with the DETR.
The Levy will be administered by Customs & Excise. Energy suppliers will have to register for the Levy and will charge business customers the Levy as part of their energy bills. We understand that VAT will be charged on the fuel costs inclusive of the Levy. This is a further case of a tax on a tax. At the very least it imposes an additional cashflow cost on businesses. For VAT exempt or partially exempt businesses, it will represent a permanent additional cost.
At this stage it is not clear how energy users who have negotiated a reduction in the Levy with the DETR will get the relief. It could be given directly on energy bills, requiring suppliers to monitor and keep details of their customers' agreements with the DETR. Alternatively, the full amount could be charged by the supplier with the customer reclaiming the excess payment from the DETR or Customs & Excise.
Customs & Excise issued a consultation paper on the Levy earlier in the year.
Further details of the proposals are now being released with a full report on the results of the consultation process expected at the beginning of October. Draft legislation for inclusion in next year's Finance Bill should follow shortly.
Aggregates Tax
Before the last election, the Chancellor of the Exchequer indicated that he believed an aggregates tax should be introduced. A study was commissioned by the DETR.
The Quarry Products Association was asked to respond to the study. The response was regarded by the Government as insufficient to eliminate the perceived need for the tax.
Customs and Excise have now issued a consultation paper setting out draft legislation to introduce an aggregates tax. The proposed tax is to be levied on the extraction of aggregates, rather than their use. The aim is to encourage re-use of material. The tax is due to come into force next year.
As yet the rate of tax has not been announced. However the DETR estimates that the environmental cost caused by the aggregate extraction industry amounts to £380 million per year, with the environmental cost of extraction in National Parks being put at £6 per tonne extracted. It is assumed that these figures are an indication of the likely rate of tax.
As with landfill tax, it is likely that the cost of this new tax will be passed on to the construction industry. Users of aggregates should consider now how to manage the potential impact of the tax on their costs in future.
Pesticides Tax or Charge
The prospect of a tax or charge on pesticides has not been given much publicity to date. We understand that the Government's objectives are:
- to secure reductions in the use of pesticides
- to achieve substitution either by less harmful pesticides or by alternative techniques
- to increase efficiency in usage by improved targeting
- to provide incentives for environmental protection measures.
The Government has stated its commitment to a pesticides minimisation policy which seeks to promote a reduction in the use of pesticides, consistent with adequate crop protection. Although the benefits of pesticides are accepted it is likely that a policy based on the principle that the polluter pays will underlie any action taken by the Government to achieve its commitment.
At present we understand that it has not been decided whether to impose a charge or a tax. However, the Government believes that the external costs of pesticide use amount to some £100m - £300m per year. They wish to control those costs.
A pesticides charge could operate as a statutory charge with a licensing system on manufacturers and/or users. A tax would be a product tax (like excise duty) which would be collected by Customs and Excise.
No details have been given of how the charge or tax could be introduced or the possible rate. However, a report to the DETR suggests a possible rate of £6 per kilo. This would increase the cost of pesticides by some 30%.
It is likely that an announcement will be made in the Budget in March 2000. If introduced, it will represent a substantial increase in costs for the chemical industry, who will have to collect the tax, and for the agricultural and horticultural industries.
For further information please contact Beverley Tanner, Trinity Court, 16 John Dalton Street, Manchester M60 8HS, Tel: +44 161 830 5000.
This article was first published in the Autumn 1999 issue of Hammond Suddards' Tax Insight Newsletter.
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
