The Committee of Public Accounts has agreed to the following Report:
THE LANDFILL TAX CREDIT SCHEME
INTRODUCTION AND LIST OF CONCLUSIONS AND RECOMMENDATIONS
- The Landfill Tax Regulations 1996 established Landfill Tax as the first UK tax with specific environmental purposes. HM Customs and Excise collect Landfill Tax from landfill site operators who can claim tax credits of up to 90 per cent if they contribute to environmental projects under the Scheme. Eligible projects include the reclamation of contaminated land and the provision of public amenities and since 2000 the focus has been on sustainable waste management projects. In 1999-2000, Customs collected some £430 million in landfill tax and landfill site operators claimed tax credits of £93 million. Tax collected in 2000-01 rose to £462 million and tax credits to £109 million.
- The Landfill Tax Credit Scheme involves complex and novel relationships between the private and public sector. The Government set up a private sector company, limited by guarantee (ENTRUST) to regulate it. The Environment, Transport and Regional Affairs Committee have raised concerns about its operation, and made a range of recommendations to improve its governance and effectiveness.
- On the basis of a Report by the Comptroller and Auditor General on Customs' Appropriation Account for 1999-2000, we looked at the accountability arrangements established for the Scheme, how it has been monitored, the governance of ENTRUST and arrangements for assessing whether the Scheme provides value for money.
- In the light of this examination, the Committee draws three overall conclusions.
- Landfill Tax and the associated Tax Credit Scheme cut across departmental boundaries, and involve innovative partnerships with the private sector and local communities. The results are complex administrative and oversight arrangements, a lack of overall accountability for the Scheme and a lack of transparency.
- ENTRUST is the body responsible for regulating the environmental tax credits scheme. Despite changes in response to earlier work by the Environment, Transport and Rural Affairs Committee, there remain concerns over whether the waste industry has too much influence over the Scheme, for example because it has no incentive to fund certain types of projects such as recycling. There is also concern whether ENTRUST has the powers to regulate the Scheme properly and about the costs of administration. The Government needs to address these issues in its review of the Scheme, which could include the need for and the role of any regulator.
- Since Landfill Tax Credits were introduced in 1996, over £400 million has been contributed to environmental bodies including £109 million in 2000-01. However, there are no arrangements for evaluating the success of individual projects or of the Scheme overall. Whether the Scheme continues or is replaced, the Treasury needs to ensure that there are credible arrangements for regular evaluations to identify good practice and inform decisions on whether changes to the arrangements are required.
- Our more specific conclusions and recommendations are as follows.
On accountability for the scheme
- The Landfill Tax Credit Scheme is innovative and has complex
administrative and oversight arrangements. The Department
for Environment, Food and Rural Affairs are responsible
for developing and overseeing the implementation of the
Government's strategy for delivering sustainable waste management
of which the Landfill Tax and the associated Credit Scheme
form a part. ENTRUST is the body responsible for regulating
the Environmental Tax Credits Scheme and HM Customs and
Excise are responsible for ensuring that ENTRUST are an
effective regulator. Arrangements should be put in place
to give lead responsibility to one Department for the effective
operation of the Scheme, including value for money.
- Administrative costs of the Scheme, averaging 9 per cent
excluding expenditure by Customs, are not out of line with
others, such as the National Lottery Commission. Customs
accept it would have been simpler to collect the tax and
fund environmental projects through grants, but this would
have removed the private sector status of the Scheme and
reduced local schemes and decision making. There is a balance
to be drawn between costs and effectiveness, but we would
like to see benchmarking of the administrative costs built
into Customs' regular oversight of ENTRUST or any successor
- At the time of our hearing, over £120 million of tax credits
remained unspent by environmental bodies. Although the percentage
of funds committed has increased to around 65 per cent,
and projects can take some time to mature, we expect Customs
and ENTRUST to increase the percentage of funds committed
to projects within 2 years, which should deliver benefits
to local areas more quickly.
- Given the value of tax credits still to be spent, and
that ENTRUST's reserves are only sufficient to fund their
running costs for about 9 months, there is a doubt whether
they would have insufficient funds to fulfil their duties
should the Scheme be run down. Customs should monitor the
position closely, to ensure that ENTRUST reduce their commitments
in line with any changes in their role and do not have to
make calls on public funds to complete their work.
On monitoring the scheme
- ENTRUST are responsible for the overall probity of the
Scheme, which requires decisive interventions by them when
they identify problems. However, their statutory sanctions
are limited to revoking an environmental body's enrolment
or going to Customs to change the regulations. These sanctions
are too crude and heavy-handed a remedy for most of the
problems that arise and can cause delay. In reshaping or
revising the scheme, Customs should ensure that ENTRUST
have a range of sanctions available to them. These should
include the option to suspend environmental bodies from
undertaking new projects until satisfactory action has been
On the governance of ENTRUST
- The Environment, Transport and Rural Affairs Committee
have pressed for improvements in the governance of ENTRUST,
including reducing the influence of the waste management
industry and greater transparency in the way the scheme
operates. Changes have been made, for example to widen membership
of the Board of ENTRUST to increase representation from
sectors outside the waste management industry, which should
help to reduce the risk that the industry could unduly influence
the types of scheme supported.
- The Board of ENTRUST dealt promptly with the problems
that arose over the way Dr Sills, the Chief Executive, dealt
with issues arising from ENTRUST's evidence to the Environment,
Transport and Rural Affairs Committee in 2001. They concluded
that Dr Sills actions were an ill-judged and inappropriate
response to the Board's instructions, and for this and other
reasons decided to consider disciplinary charges against
him. The Board subsequently reached agreement with Dr Sills
on a severance package, including a severance payment of
- We cannot countenance the confidentiality agreement which
the Board entered into as part of this agreement and which
in part seems to have been designed to prevent disclosure
of matters in the public interest. Although ENTRUST is a
private company limited by guarantee it is fulfilling public
responsibilities and is funded out of tax credits provided
by the taxpayer. It should operate within public sector
standards of disclosure, and as we have said on many occasions
the use of confidentiality agreements is unacceptable.
FOR THE LANDFILL
TAX CREDIT SCHEME
- The Department for Environment, Food and Rural Affairs, in
succession to the Department of the Environment, Transport and
the Regions, are responsible for developing and overseeing the
implementation of the Government's strategy for delivering sustainable
waste management of which the Landfill Tax and the associated
Credit Scheme form a part. ENTRUST is the body responsible for
regulating the environmental tax credits scheme and HM Customs
and Excise are responsible for ensuring that ENTRUST are an
- The complexity of these arrangements (Figure 3 of the
Comptroller and Auditor General's Report reproduced below) have
tended to obscure lines of accountability for and governance
of the Scheme.
Figure 1: The administrative arrangements for
Landfill Tax and the Environmental Bodies Tax Credits Scheme
Source: C&AG's Report
- In its Report in 1999, the Environment, Transport and Regional
Affairs Committee recommended changes to improve the operation,
accountability and transparency of the Landfill Tax Credit Scheme.
These included giving guidelines on the distribution of funds
to specific environmental objectives, ensuring that ENTRUST
can demonstrate that environmental bodies are providing value
for money, ensuring that administrative costs are not too high,
and providing greater transparency through publication of a
register of third party donors.
- Despite changes to the Scheme in January 2000, the Comptroller
and Auditor General concluded that there remained some fundamental
weaknesses in the design of the Scheme, and he made a series
of recommendations, including that Customs should examine whether:
- the Scheme could be simplified without loosening key controls over tax credits and expenditure on projects; and
- the organisational responsibilities could be more clearly separated to avoid concerns over conflicts of interest. For example the waste management industry plays a key role in deciding which types of projects to fund, but is also represented on environmental bodies which carry out the projects and on the Board of ENTRUST which oversees the Scheme.
- One purpose of the Scheme was to bring together large numbers of different bodies, including ENTRUST, contributing landfill site operators, environmental bodies and third party contributors. This led to complex arrangements, which caused problems for Customs in ensuring that the many relationships between the various bodies could be tracked and watched as properly and as carefully as they should be. A lack of transparency also made it difficult to monitor who was taking which decisions with what outcomes, with potential for conflicts of interest to arise. Customs do not believe, however, that complexity has led to any significant scope for fraud. At the time of our hearing, there were only two known cases and two under investigation, out of about 9,000 projects overall.
- The changes made to the Scheme in January 2000, following the Environment, Transport and Regional Affairs Committee's Report, were intended to reduce the scope for conflicts of interest. They included a register showing third party donors to the Scheme. The Government decided however that the register, which was maintained by ENTRUST, should remain confidential so as not to deter contributions. In addition, regulations to prevent contributing landfill site operators benefiting from the work of an environmental body were extended to prevent benefits to third party contributors.
- These changes still allow local authorities to bring forward schemes that are of value to their area. They can give money to a landfill operator in their area, and that operator can channel the money to local environmental bodies. Although the local authority cannot have control over the environmental body allocating the money, Customs recognise that the increasing involvement of local authorities in landfill tax credit schemes raises some questions about transparency and benefit. Ministers plan to have look at this in a fresh review of the Scheme, including publication of the register of donors.  Customs are also uncomfortable about cases where local authorities require successful bidders for waste disposal contracts to make contributions to specified environmental bodies, and in line with the Comptroller and Auditor General's recommendations are looking at whether they can stop this practice.
- On average 9 per cent of total expenditure is spent on administrative costs, of which ENTRUST spend 2 per cent. Customs' costs of operating the Scheme are less than £1 million. Following the Environment, Transport and Regional Affairs Committee's Report, Customs had looked closely at administrative costs, and concluded that they were not out of line with similar bodies, and were lower, for example, than English Nature, English Heritage or the National Lottery Board.
- ENTRUST are funded by a levy of two per cent on contributions received by environmental bodies and by charging environmental bodies an enrolment fee of £100. They spent some £1.3 million in fulfilling their duties in 1999-2000 and their budget was increasing. At the time of our hearing, ENTRUST had £1.78 million in reserves, enough to fund their activities for only 9 months if the Scheme was run down or stopped. However, many of the projects funded out of tax credits run for three, four or even five years, and environmental bodies hold £120 million of unspent credits. ENTRUST assured us that they had sufficient funds to continue to do their job. The figures suggested to us, however, that their capacity to do so might be tested if the Scheme were to be closed to new contributors.
- Customs told us that while it would have been much simpler to collect the tax and fund the environmental projects through grants, this would have removed the private sector status of the Scheme, which was important because it qualified for matching funding, for example from the European Union. It would also have risked losing the smaller, bottom-up parish council schemes that central government were not good at generating, and which were one of the objects of the Scheme. The Scheme allows for local level decisions, and 60 per cent of the £400 million had been committed to small local level schemes. Customs doubted whether the existing Scheme could be simplified significantly without loosening key controls over tax credits and expenditure on projects.
MONITORING THE LANDFILL TAX CREDIT SCHEME
- ENTRUST regulate the Landfill Tax Credit Scheme. They enrol environmental bodies and monitor their expenditure and activities to ensure that they act within the rules of the Scheme.
- ENTRUST's staff and their contractor Lodge Service make compliance visits to environmental bodies to look at the structural, financial and project compliance of the body. The environmental bodies are selected for visits on the basis of a risk assessment carried out by ENTRUST. Customs are satisfied that the risk based systems are at least as good as those they use on VAT, and they monitor ENTRUST and accompany them on a certain number of visits, to make sure those controls operate in practice. In 1999-2000 ENTRUST and Lodge Service visited some 420 environmental bodies of which around one third were found to be fully compliant with the requirements of the Regulations (Figure 2). The main reason why bodies failed to comply was because they did not provide ENTRUST with information required under the Regulations.
Figure 2: The result of ENTRUST's compliance visits to environmental bodies
Source: C&AG's Report
- Where compliance visits show that an environmental body has failed to comply with the Scheme in a significant way, ENTRUST usually follow up cases by visiting the body to agree an action plan to rectify the problems found. In 1999-2000 ENTRUST carried out follow-up visits to 55 bodies.
- ENTRUST see it as their role to maintain the overall probity of the Scheme, which requires decisive interventions when they identify problems. They can revoke an environment body's enrolment in the Scheme where the body fails to comply with the rules, voluntarily wishes to leave the Scheme or ceases operating. To date, there have been 10 enforced revocations where bodies misspent money or failed to account for it properly. In 1999-2000, ENTRUST revoked the enrolment of 26 bodies, mostly because bodies had left the Scheme or ceased operating. However, five had failed to comply with the rules. Two of these bodies are under investigation by the police for irregularities in dealing with funds on projects amounting to £4 million. ENTRUST and Customs are looking into two other cases to confirm that contributions have been spent on approved projects. In the remaining case ENTRUST have confirmed that there were no irregularities in the way contributions have been used.
- There has been no case where ENTRUST have revoked a body's enrolment purely because of failure to provide their audited annual accounts and information on, for example funding received and expended. In the vast majority of cases ENTRUST consider that such action would be too extreme a response to small failures in technical compliance. Instead, they work with the environmental body, carry out follow up visits, tighten up the bodies' procedures and make sure they become compliant. For example, in March 2000 only 8.3 per cent of environmental bodies had submitted their financial returns within the target time of three months, but by March 2001 this had increased to 71 per cent. ENTRUST had also tracked down missing information from environmental bodies on contributions received, which had helped them resolve unmatched credits of £8 million at January 2000.
- ENTRUST do not have the sanction of preventing such bodies managing further schemes until they comply, but they have introduced three levels of warning letter, which have proved very effective in reducing the backlog of information, without statutory backing. If they identify practices which are undesirable because of the potential for abuses of the Credit Scheme, they can make representations to Customs to help bring about changes in the Regulations; the amendments to the Regulations made in January 2000 were partly in response to ENTRUST's concerns. They have discussed the need for a wider range of sanctions with Customs, who accept that if further problems occur there could be a case for giving ENTRUST additional powers, and are looking at a number of possibilities including the power of suspension.
GOVERNANCE OF ENTRUST
- The Board of ENTRUST was established to represent all of the interests involved, including people with experience in the waste industry, from local authorities, environmental groups, academics, lawyers, accountants and industry generally. While individuals with a background in the industry form a large group on the Board they do not form a majority. Inclusion of landfill site operators recognised that they had a strong interest in ensuring that ENTRUST was a keen, resolute and effective regulator. The operators contributed the money against which they could claim tax rebate, and faced clawback if the relevant environmental body turned out to be non-compliant.
- The Comptroller and Auditor General noted the risk that the decisions of the Board on the regulation of the Scheme could be unduly influenced in favour of site operators by such a large grouping, especially as the waste management industry provides funds to the Scheme. This could lead to bias, even unintentional, against certain types of schemes or environmental bodies. However, Customs consider that they would notice if this risk occurred because senior officials attend the Board meetings on a regular basis as observers. The recent appointment of four directors with backgrounds in sectors other than the waste management industry should also help to reduce this risk.
- In 2001, the Environment, Transport and Regional Affairs Committee looked at the role of ENTRUST. The Committee concluded that while it had found no evidence of wrong doing, the way ENTRUST had been set up, the limited role it could play and, to some extent, its behaviour had left it a tarnished organisation in need of radical change. They recommended replacement of ENTRUST with a regulator closer to Government, and with an active role in steering the tax credits available into the most appropriate projects. In its response, in February 2002, the Government noted that the need for, and the role of, any regulator would be looked in the light of the outcome of the review of the Landfill Tax Scheme then underway.
- The Environment, Transport and Regional Affairs Committee also issued a separate Report on the conduct during their hearing of the Chairman and Chief Executive of ENTRUST. Subsequently, ENTRUST and Dr Sills apologised to that Committee for a contempt of Parliament contained in a letter from Dr Sills to Dr Malcolm Aitkin, dated 27 February 2001. The Board of ENTRUST accepted corporate responsibility, while pointing out that the letter of 27 February did not represent a resolution of the Board, but was an ill-judged and inappropriate response by Dr Sills to Board instructions. Concerned that Dr Sills performance may have been unsatisfactory in other respects, the Board decided to investigate and suspended him on full pay while this took place.
- In the light of the Report of the Investigation Panel, the Board set up a Disciplinary Sub-Committee to consider disciplinary charges against Dr Sills. Following notification of this decision to Dr Sills, discussions took place which resulted in an agreement between him and ENTRUST for the termination of his employment on 30 June 2001. Dr Sills was not dismissed, but lost his job because of a breakdown in the confidence that has to exist between the non-executive directors of a company and its Chief Executive.
- The Board reached agreement with Dr Sills on a severance payment of £59,900 plus £100 to make legally enforceable his ongoing duty of confidentiality in respect of trade secrets, confidential information and otherwise. The settlement did not include any contributions for loss of pension. In addition, legal advice cost ENTRUST some £23,000. In reaching this settlement, the Board had regard to legal advice that there were no grounds for summary dismissal, and that Dr Sills would in any case be entitled to six months pay (£32,871) in lieu of notice. They decided to make an additional discretionary payment, of 5 months salary, approximately £27,000, taking into account that any disciplinary actions would take some time to complete, would involve legal and management costs and would delay the appointment of a new chief executive to help ENTRUST move forward. In reaching this settlement, ENTRUST and Dr Sills agreed that its terms should remain confidential and a mutual obligation not to make or publish any untrue or misleading statement or comment about the other party.
1 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) para 4.2 and inset box, Waste liable to Landfill Tax, R16. Back
2 ibid, para 4.4 Back
3 HM Customs and Excise Annual Report 2000-01, Cm 5309, March 2002, Trust Statement Note 3 Back
4 Environment, Transport and Regional Affairs Committee: 13th Report, The Operation of the Landfill Tax (HC 150-I, Session 1998-99); 5th Report, Delivering Sustainable Waste Management (HC 36-I, Session 2000-01); 10th Report, Alleged Misconduct affecting a Witness before the Environment Sub-Committee (HC 380, Session 2000-01) Back
5 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) Back
6 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) para 4.26 Back
7 13th Report of the Environment, Transport and Regional Affairs Committee, The Operation of the Landfill Tax (HC 150-I, Session 1998-99), and the Government Reply (Cm 4461, 1999) Back
8 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) para 4.27 Back
9 Qs 2, 5 Back
10 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) paras 4.5, 4.19, 4.21; Qs 149-152; Ev 24-25, Appendix 1 (ref to Q151) Back
11 Qs 96-100 Back
12 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01 ) para 4.27; Q170 Back
13 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) para 4.7; Qs 54, 71-74 Back
14 Qs 39-44 Back
15 Qs 3, 5-6, 76 Back
16 Q161 Back
17 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) para 4.9 Back
18 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) paras 4.12-4.13; Qs 158-160 Back
19 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) para 4.16 Back
20 Ibid, para 4.20; Qs 14-17 Back
21 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) para 4.25; Qs 14, 29, 101-109, 111-113; Ev 24, Appendix 1 (ref to Q143) Back
22 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) para 4.21; Qs 28-35, 110, 117-128 Back
23 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) para 4.10 Back
24 Qs 58-59, 153-157, 163-164 Back
25 C&AG's Report on the Appropriation Accounts 1999-2000, Volume 16 (HC 25-XVI, Session 2000-01) para 4.11 Back
26 5th Report of the Environment, Transport and Regional Affairs Committee, Delivering Sustainable Waste Management (HC 36-I, Session 2000-01) Back
27 4th Special Report of the Environment, Food and Rural Affairs Committee, Delivering Sustainable Waste Management: Government Reply to the 5th Report from the Environment, Transport and Regional Affairs Committee, Session 2000-01 (HC 659, Session 2001-02). Back
28 10th Report of the Environment, Transport and Regional Affairs Committee, Alleged Misconduct affecting a witness before the Environment Sub-Committee (HC 380, Session 2000-01); Qs 205-206, 210; Ev 26, Appendix 2, paras 3-5 Back
29 Q9; Ev 26, Appendix 2, paras 6-7 Back
30 Qs 2-3, 6, 12-13; Ev 26-28, Appendix 2, paras 10-18, 24 Back
31 Qs 192-195; Qs 2, 35-36, 40-45; Ev 27, Appendix 2, paras 19-23 Back