What is the levy, and how does it work?

1. The Finance Act 2001 provides for a levy of £1.60 on every tonne of aggregate - sand, gravel, rock and related products such as asphalt - extracted or commercially exploited in the UK. This levy has been designed as a 'green' tax, in keeping with the Government's intention to "reform the tax system to increase incentives to reduce environmental damage", first expressed in July 1997.[3]

  2. The aggregates levy seeks to provide such an incentive by imposing on those involved in the production of aggregates a financial penalty which reflects the damage this activity causes to the local environment. The types of environmental damage caused by quarrying were described to us as dust, dirt and noise, air pollution and loss of landscape, biodiversity and amenity.[4] The fundamental intent of environmental taxation is to encourage shifts in producer or consumer behaviour, rather than to raise revenue: the Government has announced that all money paid by aggregates users to Government through the levy would be returned to business through a national cut of 0.1 per cent in National Insurance Contributions (NICs), and through a newly established Sustainability Fund.[5] The Government believes that the rise in aggregates prices will encourage "the use and development of recycled and alternative materials" in place of virgin aggregates, while the return of revenues through NICs and the Sustainability Fund will foster employment and be otherwise "beneficial".[6]

3. Throughout the UK the levy will apply to sand, gravel and crushed rock which is "subject to commercial exploitation", except where the aggregate has been previously used or is exempted for use in prescribed processes such as china clay production.[7] The levy will be charged at the rate of £1.60 per tonne on all virgin aggregates used in the UK, including imports, and on value-added products such as asphalt which are manufactured in the UK.[8] Imports of value-added products, however, will be exempt.

4. The principles of environmental taxation - using economic means to encourage innovation and reduce the environmental costs inherent in the way we live and work - are ones to which we all subscribe. We are, however, aware that there can be distinct difficulties in converting even the best theories into practice. Shortly after the Committee was appointed we received correspondence from the Quarry Products Association Northern Ireland (QPANI) which raised serious concerns about the practicalities of introducing this particular environmental levy in Northern Ireland.[9] Since the Government has announced it will bring this levy into force in April 2002, we decided in October 2001 that we should investigate as a matter of urgency. We adopted the following terms of reference:

"To inquire into the special effects which the introduction of an aggregate tax in the United Kingdom would have on the building and building supplies industry in Northern Ireland due to its land border with the Republic of Ireland, where there is no such tax; and to report with recommendations."

5. Although our inquiry was, of necessity, short, we received written evidence from 20 organisations. We have also taken oral evidence from the QPANI, the British Aggregates Association, the Construction Employers' Federation Northern Ireland, Friends of the Earth Northern Ireland, the CBI Northern Ireland, and the Financial Secretary to the Treasury, the Rt Hon Paul Boateng, MP. We are very grateful to all who contributed, particularly in light of the very short interval between announcement of the inquiry and commencement of its formal stages. We would like to acknowledge the work of the Environmental Audit Committee in the last Parliament, which reported on the aggregates levy twice, in the UK context: their work has provided a foundation for our own investigations.[10] The Financial Secretary has been both courteous and helpful in responding to our requests for information: we were pleased that following our discussions with him on 22nd November, the Chancellor was persuaded to make a partial concession on the introduction of the levy in Northern Ireland in the Pre-Budget Report. Our Report sets out why we do not think this concession, although welcome, goes far enough. We hope that it will be helpful to the Minister as he gives final consideration to the introduction of the levy.

A brief history

6. The Government first announced its intention to address the environmental costs of aggregates extraction in the July 1997 Budget. We set out the sequence of events in the levy's development below:

7. While the Finance Act 2001 establishes the framework for implementation of the levy, it provides that a date for implementation be set later under delegated legislation.[11] The Government has announced that the levy will be introduced from 1 April 2002, but the confirming Order has yet to be made. The Government has now made a partial concession on the timing of the introduction of the levy in Northern Ireland in the Pre-Budget Report. We discuss this in paragraphs 88-90 below.

The industry's reaction

8. To date, the Government's progress in implementing the levy might be described as slow, or even cautious. Yet although the pace of progress in developing the levy was leisurely, the industry in Northern Ireland was also slow to react. This was in spite of opportunities which the Minister said had been provided for consultation.[12] The primary reason for the industry's slowness was that its main representative body — the Quarry Products Association — "was only in an embryonic stage" when the Government's intentions were first announced in 1997.[13] The Northern Ireland branch of the QPA was not established until 1999: the Northern Ireland producers may by then have become concerned that their particular problems were not being communicated effectively by the national organisation.[14] The British Aggregates Association was not formed until April 2000.[15]

9. Once the QPANI was established it arranged, through the CBI, a meeting with Treasury Officials on 29 September 1999.[16] Curiously, the Minister twice failed to refer to this meeting when discussing the industry's participation in the development of the levy.[17] From the industry's point of view two years then passed without any evident reaction, until HM Customs and Excise officials visited Northern Ireland in August 2001.[18] We will come back to this point later in our Report, while noting here that responsibility for communication problems is, to a degree, shared by the various interests.

Quarrying in Northern Ireland

10. Quarrying and associated industries in Northern Ireland make a significant contribution to the Northern Ireland economy in the following ways:

• Employment: the industry employs approximately six thousand people, many of whom live in rural communities designated by the Northern Ireland Executive as TSN (Targeting Social Need).[19]

• Construction and Regeneration: the industry is "essential ... in the development of Northern Ireland's economy in terms of construction, housing [and] roads".[20]

• Export: while we were unable to obtain accurate global figures, we were told that the industry is a significant exporter to the Republic, with as much as 90 per cent of production from some plants being sold across the border.[21]

• Contribution to UK production: the industry produces 22 million tonnes of aggregates a year, constituting 10 per cent of annual UK production.[22]

The special circumstances of Northern Ireland

11. The introduction of the levy is likely to be particularly painful to the industry in Northern Ireland for one overwhelming reason: Northern Ireland is the only part of the United Kingdom which has a land border with another state. While the levy in other parts of the UK is predicated on the impracticality of transporting aggregates over long distances — a strong incentive to users to shift to the consumption of other more sustainable resources — the land border with the Republic of Ireland enables ready access to products which are not similarly taxed. Thus, the imposition of the levy may result in other responses than those generally predicted and sought.

Our concerns

12. While there are a number of interesting questions about the implementation of the tax generally in the UK, we have not sought to deal with them in this inquiry. Our concerns focussed on issues which were particular to Northern Ireland, many stemming from the presence of the border. The questions to which we sought answers were:

  (i)  Will the tax be successful, in Northern Ireland, in reducing the associated environmental problems of noise, dust and air pollution?

  (ii)  Will the tax in Northern Ireland succeed in encouraging a shift away from the use of virgin aggregates towards the use of recycled aggregates and other alternative materials?

  (iii)  What will be the effects on Northern Ireland's economy?

13. We were pleased that the Financial Secretary agreed with us that the presence of the land border made Northern Ireland "unique and special".[23] With that common ground established, we thought it right to present to him the arguments we had heard from our other witnesses.

4  Q91 Back

5  QQ233, 261 Back

6  QQ230, 261 Back

7  Finance Act 2001 (c. 9) ss17 - 18 Back

8  Finance Act 2001 (c. 9) s16 Back

9  Ev p1 Back

10  Fourth Report of the Environmental Audit Committee 1999-2000 (HC 76-I) and Second Report of the Environmental Audit Committee 2000-2001 (HC 71-I) Back

11  Finance Act 2001 (c.9) s16(6) Back

12  Q230 Back

13  Q194 Back

14  Q194 Back

15  Ev p68 Back

16  Ev p28 Back

17  QQ230, 237 Back

18  Q43 Back

19  Ev p28 Back

20  Q161 Back

21  Q2 Back

22  Q29 Back

23  Q233 Back