Between a rock and a hard place

This article appeared in Building in June 2006 and was written by Graham Alty, Partner, UK Construction & Engineering Group, Pinsent Masons.

The Government may be forced to repay millions of pounds if European Courts find aggregates tax illegal. 

The British aggregates industry may well soon be celebrating a victory against the Government, if the controversial and much maligned aggregates levy receives its comeuppance courtesy of a decision of the European Courts.  Whilst this is obviously good news for aggregates producers, the question is whether other members of the construction industry will share this good fortune with consequential cost savings.  Much will obviously depend on the substance of the decision, but it may be wise to consider in advance whether there are appropriate provisions dealing with levy and tax fluctuations in your existing and contemplated contractual arrangements.  The basis of the case against the Government and its potential impact on construction contracting are considered below.

The Case: 

The £1.60 per tonne tax on freshly dug aggregates, which was introduced in April 2002 and generates approximately £360 million a year in revenue, is currently being challenged by the British Aggregates Association (the BAA) at the European Court of First Instance.

The appeal by the BAA is based on the legitimacy of the European Commission's decision to approve the tax in 2002.  The BAA claim that this decision was unsafe and distorted competition.  The levy may well be declared illegal in which case the Government would have to completely re-think its application.  This could mean the complete abolition of the levy, changes being made to make it compatible with EC law, or its replacement with a new tax that does not seek to exempt specific industries and the repayment of tax illegally collected.

Whilst the decision of the European Court is not expected until late summer / early autumn, aggregates producers have been advised to file precautionary claims (which currently total £36 million) against the Treasury for the repayment of levy paid.  Such claims are prudent because of a recent EU case which decided that the judgment in relation to the illegality of a tax would only come into effect at the end of the tax year except where early claims had been made.

It is notable that aggregates producers do not need to agree to reimburse customers to whom the tax has been "passed on" before attempting to claim back the tax.  However, agreeing to reimburse customers may maximise the amount of levy that is repayable.

Effect on the Industry:  

Irrespective of whether quarriers decide to reimburse customers who have already paid aggregates tax, it is highly likely that the effect of a win for the BAA will be to reduce or peg the price per tonne going forward.

Many building contract employers will be keen to ensure that any cost savings made as a result of the possible abolition of the tax are passed on to them.  Similarly, contractors will wish to benefit from any reductions in sub-contract prices.

Parties may be concerned that this will require complex drafting in their building and sub- contracts.  However, in many cases there may already be some lesser known and little used standard provisions that may well do the trick. 

A number of standard form building and sub-contracts contain provisions dealing with levy and tax fluctuations.  Such clauses may operate "each way", or can be one sided so that the employer under the contract receives the benefit of any savings where a tax is amended, but conversely is not required to pay any increase. Fluctuations provisions are, however, commonly deleted and may have to be reinstated if required.

If the contract is silent as to fluctuations this may leave the parties unclear as to the financial effects on their contractual arrangements if the tax is repealed.

Therefore, while quarriers line up to submit precautionary claims, other contracting parties may be similarly well advised to review their contracts with a view to considering whether levy and tax fluctuation provisions are appropriate, in advance of the decision of the European Court being handed down.

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