Little joy in appeal over aggregates levy

A VAT and Duties Tribunal has been faced with two points of legal interpretation concerning the aggregates levy. The case has provided the first test of the terms of a levy exemption for aggregate removed from a watercourse. The central dispute was over whether the lake in question was a "watercourse".

The levy was established under the Finance Act 2001, and the provisions as originally drafted exempted aggregate "removed from its originating site" before the commencement date of 1 April 2002.

In Humberside Aggregates and Excavations Ltd v Commissioners of Customs and Excise (Manchester VAT and Duties Tribunal, 22 October 2004), the company had attempted to avoid the levy by the simple device of selling and transporting a quantity of aggregate to a nearby quarry before 1 April 2002, having it resold to itself and returned by that date, and then reselling to customers.

The nominal removal before 1 April meant that strictly the conditions of the exemption had been met. However, in 2002 the Chancellor closed the loophole by retrospectively amending the exemption, making it clear that it applied only to aggregate which was not on the originating site on the actual commencement date.

Humberside argued that the tax was not meant to apply to a second or third commercial exploitation of the aggregate - i.e. its resale by the neighbouring quarry, and the subsequent retailing to genuine customers. But the tribunal rejected this argument, and held that given the amendments to the taxing provision, the aggregate in position on site on 1 April was plainly subject to the levy.

However, the tribunal accepted that the steps taken by Humberside to avoid the tax before the amendment were perfectly legitimate. Furthermore, guidance issued by the Commissioners after the amendment continued to give the now misleading impression that any aggregate removed before 1 April was exempt.

Humberside was required to pay the levy, but given these mitigating circumstances the tribunal felt that the company had a reasonable excuse to make an understatement on its tax liability, and therefore should not pay the civil penalty also being sought by the Commissioners.

The second point concerned another exemption provided for in the legislation which related to aggregate removed from the bed of a watercourse and in the course of restoring, improving or maintaining the watercourse.

A wildlife trust had acquired from Humberside a number of lakes created by former excavation works. The trust wished to extend one of the lakes, and agreed that Humberside should carry out the excavation work and keep any aggregate won.

Humberside claimed that aggregate from the lake was exempt from the levy under the watercourse provisions, and the central legal dispute was whether the lake in question was a "watercourse" or not.

A guidance notice from the Commissioners indicated four conditions: a natural source of surface or underground water; flow under the action of gravity; a reasonably well-defined channel of bed and banks; and confluence with another watercourse or tidal waters.

The tribunal was referred to various old cases dealing with the meaning of watercourses, but held that the notice "is a perfectly adequate working definition for the purposes of aggregates levy".

Looking at the facts and geological conditions of the various lakes, the tribunal held that the lake in question did not satisfy all the conditions. It may have had banks, but not a well-defined bed. Although connected by a drain to one of the other lakes, there was no "flow" under the action of gravity. And moving water from one pond to another did not create a "confluence" with another watercourse.

Clearly, the decision is fact-specific, though it applies general principles of interpretation. Economic or fiscal measures are likely to be increasingly used in many areas of environmental policy in preference to traditional forms of regulation. But the decision underlines the fact that such a move does not necessarily imply any lessening of appeal rights and disputes over legal interpretation.

Richard Macrory, Professor of Environmental Law, University College, London

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