Select Committee on Northern Ireland Affairs Appendices to the Minutes of Evidence


Memorandum submitted by the Northern Ireland Executive


  1.  In Budget 2000, the Chancellor announced his intention to introduce an aggregates tax of £1.60 per tonne on virgin aggregates, with effect from April 2002. The purpose of this tax is to ensure that the negative environmental impacts of aggregates production in the UK are reflected in prices, encouraging the use of recycled aggregates.

  2.  The Chancellor announced that revenues generated by the tax will be returned to business and local communities affected by quarrying through a 0.1 percentage point cut in employers' National Insurance contributions and a new Sustainability Fund designed to deliver environmental benefits. The money being returned to Northern Ireland through these measures will not have the intended fiscal neutral impact because we are disproportionately a high producer of aggregates.


  3.  The implementation of the tax causes difficulties for Northern Ireland because of the land border with the Republic of Ireland, which already enjoys several distinct advantages in terms of exchange rate and lower fuel prices. Whilst imported aggregates will be taxed to protect competitiveness, imported processed material will not be taxed because of the difficulties in establishing a global audit trail to determine the taxable aggregate content.

  4.  Given the close proximity of many of the Republic's processors to the border it has been estimated that it would be economical for companies to penetrate into the NI market up to 25 miles following the introduction of the tax. Some 62.5 per cent of NI's active quarries are located within 25 miles of the border, putting 3,000-3,500 jobs at risk. Whilst this estimate is at the upper end of the range, it must be stressed that even if 1,000 jobs were lost, this would still represent a severe blow to the NI economy. Moreover, much of the quarrying and related industries are located in New TSN/border areas of disadvantage where it would be difficult to replace lost jobs.

  5.  An added complication is that it is not clear that NI would have the same potential sources of material for recycling purposes as in the GB mainland where disused airfields, major urban regeneration projects or slag heaps can be exploited.

  6.  The Treasury's Statement of Intent for Environmental taxes released in 1997 stated that "environmental taxes must meet the general tests of good taxation . . . care must be had to implications for international competitiveness". Clearly, the Aggregates Tax has serious, perverse—though—unintended implications for the international competitiveness of NI's quarry and related industries. The tax also indirectly impacts on ports in Northern Ireland in terms of harbour development and improvement, and damages their competitive position, particularly compared with ports in the Republic of Ireland.


  7.  Implementation of the Aggregates Tax will have disproportionate budgetary implications for a number of NI departments in the devolved administration due to the lack of recycled material. Inescapable pressures in relation to substantial capital programmes undertaken by the Department for Regional Development on roads, public transport, water and sewerage are considerable. The costs of other departmental sponsored civil engineering projects, for example, the refurbishment of designated sea defences with rock armouring will add to overall public expenditure pressures. Funding these will inevitably impact on the delivery of other public services and output.


  8.  In Budget 2001, the Government stated that it had received representations suggesting that the environmental benefits of the Aggregates Tax could be enhanced by introducing a differential rate for aggregates extracted from quarries with better environmental performance. In response to this the Treasury released a document for the Differential Rate Scheme. Under this scheme, the most environmentally friendly quarries could qualify for lower rates of tax. However, the scheme gives rise to many practical difficulties such as how to assess compliance and define environmental performance. There could also be potential problems in implementing, administering and monitoring the scheme—throughout the UK, but especially in NI where quarries tend to be smaller and locally-owned.


  9.  Earlier this year, the First Minister and Deputy First Minister met the Chancellor of the Exchequer to press the case for derogation from the Aggregates Tax. In October, the Department of Finance and Personnel (DFP) Minister met the Financial Secretary to the Treasury to outline the adverse impact of the tax in NI and discuss how the problem could be best addressed. A cross-departmental working group has been established, examining the environmental aspects of quarrying in NI and how it can be improved.


  10.  DFP—on behalf of the NI Executive—has asked for a complete derogation of the Aggregates Tax for NI, due to the unique competition firms face from the Republic of Ireland. At the very least, a temporary derogation is being sought so that the impact of the tax can be analysed in GB before being implemented in NI.

  11.  In terms of securing a temporary derogation, there are two options. First, significant discounts (temporary—up to 10 years) could be granted to producers if they are viewed as securing environmental improvements. Secondly, a temporary degressive derogation would provide the industry with time to respond to the implementation of the tax for up to five years with incremental phasing in. But temporary derogation, if granted, should be unspecified and not related to any one part of the aggregates industry.


  12.  A recent exemption—granted by the HM Treasury—was the derogation in Air Passenger Duty in respect of flights departing from the Scottish Highlands and Islands. Another example is the five-year exemption from the Climate Change Levy for natural gas in NI (agreed by HMT and the European Commission). In this latter case it was accepted that the introduction of the levy to the NI gas market would inhibit its development with no resultant improvement in energy efficiency. The period of exemption is to allow the gas market in NI to develop.


  13.  NI was not consulted during the formulation of the Aggregates Tax, with regard to either the need for the tax or its likely impact. Consequently, the unique circumstances prevailing in NI—it is the only region of the UK to share a land border with another EU country and a large proportion of NI quarries operate close to that border—were not taken into account. Moreover, the nature of the industry in NI differs from that in GB. Quarries tend to be smaller, family owned, and operate close to the aggregates market so lorry mileage/transportation is, on average, lower than in GB.

  14.  It is the Executive's view that NI should not be penalised because of a failure from the outset to take account of its particular circumstances. Clearly such a proposed tax would not have a fiscally-neutral impact in NI and it has the potential to create a lasting, perverse and damaging impact on a NI quarrying industry—particularly in disadvantaged border areas.

30 November 2001

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