Select Committee on Northern Ireland Affairs Minutes of Evidence


Examination of Witnesses (Questions 1-19)

RT HON PAUL BOATENG, MP AND MR ANDREW FIELD

WEDNESDAY 20 MARCH 2002

Chairman

  1. Thank you, Minister, for coming before us again. We thank you and your officials for your co-operation. I should like to make an opening statement. As I think many of those in the room will know, one of the witnesses to our inquiry, the British Aggregates Association, has mounted a challenge to the aggregates levy in the High Court. I understand that the hearing is due to commence in the High Court next Monday, 25 March. As a consequence, certain aspects of the implementation of the levy must be considered sub judice. While the discussion of questions awaiting adjudication in the civil courts is a matter for the discretion of the Chair under the sub judice resolution of the House of 15 November 2001, I am sure that neither the Minister nor any of my colleagues here would wish to prejudice proceedings in the court next week. The BAA has kindly provided us with a summary of the arguments it is presenting to the court. From this document, I understand that the main points of debate for next week's hearing are, firstly, whether the imposition in the UK of a tax on imports and exports of aggregates effectively infringes European competition law by impeding the free circulation of products between Member States; and, secondly, whether those UK producers and materials exporters, the slate, china and ball clay industries, and producers of other untaxed minerals and industrial wastes that have been exempted from the levy under the Finance Act, 2001, have effectively been given unlawful state aid through exemption from the tax. A further challenge is mounted under the European Convention of Human Rights, Articles 1 and 14, namely the rights to enjoyment of property and freedom from discrimination. I would therefore ask my colleagues to avoid these subjects in their questions, and the Minister will, I have no doubt, avoid them in his answers. Mr Boateng, have you managed to secure a derogation for the processed aggregates industry in Northern Ireland?

  (Mr Boateng) Mr Mates, can I from the outset thank the Committee for the contribution it has made, through its report and through the correspondence we have had, to the development of our thinking in this area; it has enabled us to make the announcement that we did in the pre-budget report as to our intention to phase in the levy for aggregate used in processed products in Northern Ireland, subject to EU state aid approval. I am glad to be able to share with the Committee our confidence that that approval will in fact be forthcoming. A great deal of work has gone into our preparations and our negotiations with the Commission, and I am satisfied that we will get the necessary approval. I am also able to confirm to the Committee today that the aggregates levy will come in to force on 1 April, as we have consistently stated. That is the date which the industry has been working to, and that was the date that we gave in the announcement of the levy in the Budget 2000. It would be our intention to ensure, given our confidence that the measure will be approved—but it is unlikely to be before 1 April—that that first-year exemption for aggregates used in processed products in Northern Ireland would be backdated to the introduction of the levy on 1 April. That will be welcome news to the industry and, I suspect, to the Committee.

  2. What you said will be subject to the resolutions of the judicial review.
  (Mr Boateng) Quite so, but I have a similar confidence in relation to our case in the High Court at this time.

  3. Do you think you will get this derogation by 1 April?
  (Mr Boateng) Not by 1 April.

  4. Have you any idea when?
  (Mr Boateng) We very much hope by the end of it, and we intend to backdate it to 1 April.

  5. By which time you will not have collected any charges.
  (Mr Boateng) Quite so; that is the point. The impact on the industry will be negligible because they will have the confidence and security of knowing that it is our intention to backdate to 1 April, and that, aided by the regulations which we will have published by then, will assist them in their planning.

  6. Have you been able to make an assessment of what difference in real terms the phasing-in will make to the aggregates of processed products in Northern Ireland?
  (Mr Boateng) It is a response to the concerns of the industry. It will enable them to seek alternatives and give them a breathing space within which to do that. Certainly, the response that we have had from the industry has been supportive of that approach; but I am happy to ask Andrew Field, who, as you know, is Head of Environment Tax Branch and who has given evidence before the Committee before, to supplement any points that I make.
  (Mr Field) The intention of the phasing-in of the levy for aggregate use in processed products is to allow the sector to adapt to the introduction of the levy and to take advantage of opportunities to use waste or recycled construction materials as alternatives to virgin aggregate in processed products, and to increase the capacity to do that over the five-year period of phasing-in that the Government has proposed.

Mr Beggs

  7. Welcome to our Committee. The big problem we have to face is the fact that there is a land border with the Irish Republic for those in the industry in Northern Ireland. We find that because of the land border with the Republic, the implementation of the levy is likely to divert rather than transform demand in Northern Ireland. Are you satisfied that your current plans will prevent this from happening in the short and long term?
  (Mr Boateng) We have looked closely at this issue and listened to the representations made. We think that the phasing-in of the levy in this way will give the sector time to adjust to the introduction of the levy. It is an opportunity, as Mr Field has said, to use more environmentally-friendly inputs. We appreciate and well understand the impact of the particular land border issue that you have identified, but do not think that the phasing of the levy in the way that we propose, and the benefit that derives from that, will be substantially hindered by that fact.

  8. Whilst phasing-in might encourage increased use of recycling materials, how likely is it that users from Northern Ireland will do this ultimately? Processed aggregates from the Republic of Ireland will still be cheaper.
  (Mr Boateng) They have a fiscal incentive here to use recycled goods in the way that we have described. They will have the certainty in terms of their pricing and sourcing that the phased approach gives them. We also anticipate that the environmental concerns that we have in terms of the damage to the environment in Northern Ireland from this particular process, and the importance of internalising the externalities and the costs of that damage will also apply south of the border. There does not suddenly cease to be a concern about the environment in this particular respect when one crosses over into the Republic. In the medium and long term, one would expect the Republic to be recognising the importance of the approach that we are taking in terms of internalising the externalities because that is the approach that is being developed and taken across a range of environmental issues across the European Union; so any short-term advantage, in my view, is likely to be just that—short-term.

Chairman

  9. That is very much dependent on the Irish Republic following suit and taking the same measures as you have.
  (Mr Boateng) One always hopes that environmental good practice is something that will be emulated by one's partners and competitors. We certainly believe, Mr Mates, that the United Kingdom has a good story to tell in terms of its policy and fiscal responses to environmental challenges. Certainly, when one talks to environmental NGOs, many of whom have links with sister and brother organisations in other parts of the Union, they are urging those other parts of the Union to follow our lead in many areas.

  10. We are obliged to you for your answers, but it is not exactly an answer to the question that Mr Beggs was asking, and if you will pardon the phrase, there is a certain schizophrenia about this, is there not? You have acknowledged that the border is special; you have acknowledged that you need to take measures to relieve the special pain that would accrue to Northern Ireland producers of aggregates in the adjustment to your original plans; but in fact you have merely postponed that pain. There will come a point during this five-year period when all of the arguments that were presented, which had caused you to introduce the gradual increase, will no longer take effect because it will be economically cheaper to import it, with all the environmental disadvantages you have agreed there would be. Therefore, it is pain postponed, not pain avoided, in relation to the particular pain in Northern Ireland.
  (Mr Field) The difference is that instead of a levy coming in with a full hit in the first year of the levy's introduction, the levy will be phased in over a period of five years. During that time, the industry will have a much greater opportunity to adapt and to take advantage of alternative sources of material to virgin aggregate for the manufacture of these products. In the longer term, they will be faced with the full cost of the levy, and they will need to respond accordingly. That is the intention of the levy.

  11. The point I am making, to which I do not think we have yet had a concrete answer, is that while you have acknowledged that there is discrimination and a special situation because of the border, there will come a time—let us say, for the sake of argument, in year three—when it becomes more economic to import from the Republic, from those who are not paying this levy, unless they have moved in this two-year period—but the European wheels grind even slower than ours, I think it would be agreed—and Northern Ireland will be in the same position as if you had introduced the levy all at once, albeit it is acknowledged and welcomed and there is a couple of years' relief; but it is only deferred pain.
  (Mr Boateng) It depends how you define pain. We would argue—

  12. It is the special pain that the Northern Ireland producers will feel which mainland Britain producers will not.
  (Mr Boateng) There are particular circumstances in Northern Ireland in relation to the border, but the logic of the position that you are sharing with us, Mr Mates, if we were to accept it, would be to exempt Northern Ireland completely. That is undoubtedly the objective of some, but it is not an objective that we share. Were one to take that view, there are other areas of fiscal policy in other industries where there is a fiscal impact arising from the fact that we have a border with the Republic, where we would be urged to do the same. Northern Ireland is part of the United Kingdom, and there is an important principle of public and fiscal policy that requires Northern Ireland to be treated in exactly the same way as other parts of the United Kingdom, unless a sufficient case made case can be made for the approach, which we have adopted in relation to this particular tax, of phasing it in. Where that can be done with benefit, and subject to state aid, that is something that we are very open to doing; but we are not about to concede that we should take this approach in any other area—and you have other interests in relation to which, no doubt, I will have the pleasure of appearing before the Committee. It is because of the particular circumstances in Northern Ireland we should take a different approach.

  13. I almost entirely agree with what you have just said, but one of the logical conclusions is absent. You said that the logic is that we should not introduce it at all. There is another logic: that because of this particular situation, we should not introduce it until such time as you have made arrangements with the Republic that it will not be unduly unfair on Northern Ireland producers, but it will be the same; and therefore the effect will be the same throughout the United Kingdom.
  (Mr Boateng) That, too, could amount, in the eyes of the uncharitable, to an indefinite postponement, because it might be many years before they were so persuaded.

  14. You were saying earlier that you hoped they would follow your good practice quickly.
  (Mr Boateng) I do hope, but I would be reluctant to base our fiscal policy upon that hope.

  Chairman: That is why we are reluctant to accept the pain for Northern Ireland upon that.

Mr Barnes

  15. There is another possibility in regard to this matter; if there is no change in the regime so far as the Irish Republic is concerned, some assessment should be made as to which point, at year three or whatever, the problem we are presenting kicks in. In that way it would be possible to move partially along the road towards a full aggregate tax, but not then engage in the later stages until that agreement had been entered into with the Irish Republic.
  (Mr Boateng) Mr Barnes, I think that that is a very interesting and helpful proposition. Our proposal is that the levy should have a zero rate for processed products in the first year, and the rate should then rise at 20 per cent increments over the next five years to the full rate. It would certainly be important to take into account the impact of the levy on the market and on conditions in Northern Ireland. Undoubtedly, the position in relation to the Republic, as you have pointed out, will have a bearing on that.

  16. Therefore, the matter needs to be looked at very carefully.
  (Mr Boateng) It does.

  17. As the aggregate tax, in stages, moves in—what is liable to happen and not just what is happening.
  (Mr Boateng) It does, Mr Barnes. I think we have learnt from the experience around the introduction of the tax and the research that was carried out there, that there will need to be Northern Ireland-specific research. I think there is no doubt about that.

Chairman

  18. That is very encouraging, as is, as I understand it, your undertaking that if you found the levy to be having a disproportionally severe effect on Northern Ireland, you would look again at the whole of it.
  (Mr Boateng) The Chancellor keeps all taxes under review. It will be particularly important that his review of this tax is informed by appropriate research.

  19. We are particularly aware that this is a tiny drop in a very large ocean of the Treasury, and therefore our keenness is that it should not be overlooked as, to be fair, it was in research last time. May I ask a technical question? If you were persuaded, shall we say, in three years' time that this was having a disproportionate effect, what measures would you have to take to alleviate it? Would you have to come back for legislation to stop the remorseless 20 per cent increase? Could you put it on hold or could you cancel it, without time-consuming legislation?
  (Mr Field) I suspect the answer is that the annual 20 per cent increment will have to be legislated for each year so that in each year we will bring forward legislation to do that. If there was a change in the policy in that respect—[1]


1   Note by witness: "I said I suspected that the annual 20% increment in the rate of levy for processed product in NI would need to be subject to legislation each year. It is normally the case that changes in tax rates are included in the Finance Bill. However, I am now given to understand that the provisions in this year's Finance Bill are being drafted in a way which is intended to lead to the 20% increment occurring automatically. Consequently, contrary to what I said, further legislation would need to be brought forward to halt the annual 20% increase. If the Government so wished, this could be included in the relevant Finance Bill." Mr Andrew Field, 22 March 2002. Back


 
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