Another “fine” mess - the Landfill Tax gap

In HMRC’s latest report on the tax gap, published in December 2016, the landfill tax gap was reported separately for the first time as £150m. At 12% of the expected tax take the landfill tax gap is comparable to the tax gaps for tobacco duties and alcohol duties, both of which are known to be subject to high levels of illicit trading.

So what’s driving the landfill tax gap and why does it matter?

In a nutshell, certain materials (including “fines” which are a by-product of waste recycling processes) qualify for the lower rate of tax (currently £2.65 per tonne), and all other material is taxed at the standard rate (currently £84.40 per tonne).  There’s a big incentive for material to be classified as qualifying for the lower rate to secure a saving of £81.75 per tonne.

In their modelling HMRC saw a trend of increasing amounts of lower rate material being sent to landfill in recent years.  They assume in their estimates that 25% of the increase is a result of misclassification of standard rate material as lower rate.

Landfill site operators are taxed and regulated by HMRC.  There is currently a great deal of compliance activity in the sector focussing on how the lower rate of tax is being applied.  In the event that HMRC decide that more tax is due, it is the landfill site operator who is assessed for the additional tax and possibly penalties.  The extent to which the additional cost can be passed back to the waste producer will depend on the terms of the contract and their ability to pay.

Waste producers can also be exposed to tax geared penalties issued directly to them by HMRC for errors in the landfill site operator’s return where that error is caused by the waste producer deliberately providing false information or deliberately withholding information to the landfill site operator.  HMRC regards misclassifying waste to secure the lower rate of tax as falling into that category of behaviour.  Environmental regulations also apply, and misclassification of wastes can be a breach of waste ‘duty of care’ requirements and a criminal offence.  HMRC’s landfill tax compliance activity is starting to look at the waste producer, and we can expect to see HMRC seeking to apply penalties at the waste producer level.  

If you are a waste producer or a landfill site operator concerned about lower rate disposals or facing HMRC enquiries, please do get in touch.

HMRC’s Measuring Tax Gaps 2016 report and methodology can be found here Link to tax gap report

Jayne Harrold | UK Environmental Tax Leader
Profile | Email | +44 (0)121 265 5602


Holly Grantham | Solicitor
Profile | Email | +44(0)20 721 24422

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