New tax rules leave landfill operators treading a ‘fine’ line
September 17, 2019
You may recall the “skip tax” row in 2012 which was reported to have increased the cost of hiring a skip by 2,500% and resulted in skip lorries protesting outside Parliament. This disagreement focussed on the landfill tax liability of trommel fines (which are fine residual materials from recycling processes) by subjecting it to the standard rate of landfill tax. It was highly controversial and the policy was abandoned shortly after its introduction. This was not the end of the story however, as the government remained concerned that trommel fines were being incorrectly classified for landfill tax purposes.
A new regime aimed at preventing the misclassification of fines material was introduced by the Landfill Tax (Qualifying Fines) (No. 2) Order 2015 (No. 1385). The rules, colloquially known as the “qualifying fines regime” entered into force on 15 June 2015.
Since the introduction of the rules, it is no longer sufficient to simply evidence that material comprises “qualifying material”. In order to pay the lower rate of landfill tax on fines material, a landfill site operator must comply with a prescriptive regime designed to ensure that the material is not contaminated.
The LOI testing regime
One of the requirements of the rules is that the landfill site operator complies with the prescribed “loss on ignition” (“LOI”) testing regime. This was introduced to target material which, while on the face of it qualified for the lower rate of LFT, actually contained high levels of contamination which were not visible. The LOI testing regime, as the name would suggest, determines the amount of the material which is “lost on ignition” and is used as a measure to determine the level of contaminants within a sample. In order for the lower rate of landfill tax to apply the material must not exceed the LOI threshold of 10% (before 1 April 2016 the threshold was 15%) and has a number of prescriptive requirements which must be complied with.
Lower rate disposals
Over the past few years we have seen significant HMRC enquiries into lower rated disposals and adoption of a wide application of the qualifying fines rules. As a result, many landfill site operators are now facing costly landfill tax assessments which can arise out of a number of common issues in respect of the qualifying fines regime, such as failing to test at the prescribed frequency, or relying on customer data rather than testing themselves.
What happens when it goes wrong?
In our experience, HMRC’s interpretation of the qualifying fines rules can result in landfill site operators finding themselves in receipt of a landfill tax assessment simply because they didn’t follow the prescriptive regime.
It is often the case that qualifying material, which would have been lower rated had the rules been adhered to, can become subject to the standard rate of LFT as a result of what is essentially an administrative error.
The difference between the lower rate of LFT (currently £2.90 per tonne) and the standard rate (currently £91.35 per tonne) means that the numbers increase quickly, to very significant amounts which cannot be funded by the landfill operator.
The irony of the regime is that material with very small amounts of contamination, which is put through a screening process to further extract contaminants, can become subject to the standard rate of tax by default, when the material in its unaltered state would have qualified for the lower rate of tax could have been landfilled at a fraction of the cost. So cleaner, less polluting, material can bear more tax due to the fact that it was cleaned up.
It is therefore very important that landfill site operators have a good understanding of the rules and the potentially broad application of the qualifying fines regime. If you are in any doubt as to whether the material you are accepting constitutes “fines material”, it is better to err on the side of caution and commission the LOI tests at the prescribed frequency.
If you have any questions about the qualifying fines regime, or landfill tax generally, please contact us using the details below.