Sharing the spoils

The government may be forced to repay millions of pounds if the European courts find that aggregates taxes are illegal.

Although this is excellent news for aggregates producers, the question is whether other members of the construction industry will share their good fortune through cost savings. Much will depend on the substance of the decision but it may be wise to consider whether there are appropriate provisions dealing with levy and tax fluctuations in your existing and contemplated contractual arrangements. The basis of the case and its potential impact on construction contracting are as follows.

The £1.60 per tonne tax on freshly dug aggregates, which was introduced in April 2002 and generates about £360m a year in revenue, is being challenged by the British Aggregates Association at the European Court of First Instance, an independent court attached to the European Court of Justice.

The appeal is based on the legitimacy of the European commission’s decision to approve the tax in 2002. The British Aggregates Association claims that this decision was unsafe and distorted competition.

The levy may well be declared illegal in which case the government would have to rethink its application.

This could mean the abolition of the levy, changes to make it compatible with European law, or its replacement with a tax that does not seek to exempt specific industries and the repayment of tax illegally collected.

Although the decision of the court is not expected until the late summer or early autumn, aggregates producers have been advised to file precautionary claims, which total £36m, against the Treasury for the repayment of levy paid.

Such claims are prudent because of a an EU case that decided that a judgment about the illegality of a tax would only come into effect at the end of the tax year, except where early claims had been made.

Many building contract employers will be keen to ensure that any savings made as result of the abolition of the tax will be passed on

It is notable that aggregates producers do not need to agree to reimburse customers to whom the tax has been “passed on” before attempting to claim back the tax. However, agreeing to reimburse customers may maximise the amount of levy that is repayable.

Irrespective of whether quarriers decide to reimburse customers that have paid aggregates tax, it is likely that the effect of a victory for the British Aggregates Association will be to reduce or peg the price per tonne.

Many employers will be keen to ensure that any savings made as a result of the possible abolition of the tax are passed on to them. Similarly, contractors will wish to benefit from any reductions in subcontract prices.

Parties may be concerned that this will require complex drafting in their building contracts and subcontracts. However, in many cases there may be some lesser known and little used standard provisions that may do the trick.

A number of standard form building and subcontracts contain provisions dealing with levy and tax fluctuations.

Such clauses may operate “each way”, or can be one-sided so that the employer under the contract receives the benefit of any savings where a tax is amended, but conversely is not required to pay any increase. Fluctuation provisions are, however, commonly deleted and may have to be reinstated if required.

If the contract is silent on fluctuations this may leave the parties unclear as to the financial effects on their contractual arrangements if the tax is repealed.

Therefore, while quarriers line up to submit precautionary claims, other contracting parties may be similarly well advised to review their contracts with a view to considering whether levy and tax fluctuation provisions are appropriate, in advance of the decision of the European court being handed down.