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§ Dr. Alan Whitehead (Southampton, Test)I am delighted to have an opportunity to talk about the operation of the landfill levy. Until recently, that has received an almost universally positive reception, probably because people observe the two ends of the tax: first, as a tax on putting waste material into the ground instead of doing more imaginative things with it, such as recycling it or reusing it, and, secondly, the magical appearance of large sums of money for environmental schemes and good causes apparently as a result of the levying of the tax.
There can be no doubt that both observations are well grounded. The tax, which is the United Kingdom's first green tax, is in principle a sound application of the idea that one should tax "bads" rather than "goods". The indiscriminate dumping of our society's waste in landfill sites is clearly a considerable environmental bad that could be ameliorated by diverting substantial elements of the waste. A tax escalator that encourages such a change in behaviour is clearly a good idea. There is also no doubt that many local voluntary groups, church halls and environmental organisations have benefited from the £90 million that has so far been allocated from the proceeds of the tax. However, the bit in between the raising of the tax and the distribution of its elements is a problem and has rightly been the subject of a recent inquiry by the Select Committee on the Environment, Transport and Regional Affairs, and of a sustained inquiry by The Guardian.
The latter inquiry examined several aspects of the process and drew some frankly unfavourable conclusions, which will become part of the evidence in a further inquiry by the Environment, Transport and Regional Affairs Committee into the effect of the landfill tax later this year. I do not wish to trespass on that inquiry nor to cover all the issues raised by The Guardian inquiry, which covered a range of topics, including the illegal dumping of contaminated soil, the commonality of interest of environmental bodies handing out the money, the evasion of the tax itself, inspection of sites by the Environment Agency and several other issues. Rather, I want to concentrate my thoughts on an issue on which neither the Select Committee nor The Guardian inquiries focused.
Why is the operation of the tax beginning to go wrong? Is it because a few bad apples are taking advantage of a few holes in the legislation or is it something more serious, or are problems arising because of the design of the mechanism that takes us from the tax to the handouts? I believe that it is the latter. There are, and will be, attempted evasions, fly tipping and the illegal passing off of active waste as inert material. Indeed, The Guardian inquiry chronicled several such scams. They are almost an inevitable byproduct of an increasing tax and demonstrate that the tax is beginning to work in that people think that it is worth their time and trouble trying to evade it. That is an important issue, but it is no different from the consequences of any other tax. The solution to the problem is to ensure that resources are available to secure proper enforcement of the regulations.
It is painfully clear that the Environment Agency does not have sufficient ability to investigate and enforce, and that the courts still fail to take environmental crimes as 249WH seriously as they should. They are matters of process. Almost as a throwaway remark, we can say that, as a consequence of the landfill levy escalator, there will be a direct correlation between the level of tax and the level of attempted evasion, and that a proportion of the additional levy should be allocated to ensure that enforcement increases at the same rate as the tax.
It is the mechanism for distributing the tax or a portion of it that is seriously at fault. That will not be cured by better enforcement or by review of its working, as its basic logic is flawed. Unless we appreciate that, matters will get worse not better. That would be a great tragedy, because the input and output principles of the tax are sound.
Let us consider the logic of the mechanism. The tax is collected, but as it is a green tax it serves two purposes. The money does not simply go to the Exchequer, but is designed to assist a change in behaviour. On that principle, 20 per cent. of the tax take is to be recycled for environmental purposes. One might assume that that is for the purposes of the tax as stated at the time of its introduction, which were, according to a memorandum from Her Majesty's Customs and Excise submitted to the Environment Sub-Committee's inquiry,
to promote the "polluter pays" principle, by increasing the price of landfill to better reflect its environmental costsandto promote a more sustainable approach to waste management in which less is produced and more is recovered.So, where does the 20 per cent. of the tax go? The Treasury designates it as tax forgone, which means that it is regarded as having never been collected. I imagine that that is to do with Treasury rules. hypothecation and so on, but the result is that the tax, which is clearly a real tax and public money, stays in the hands of the companies that pay it. Those are the companies that collect waste and place it in landfill sites. One might imagine that they pass the costs on to the people from whom they collect, which escalates the costs and the concern about tipping in landfill sites.Instead of paying the 20 per cent. to the Exchequer, the companies pay it as a tax forgone to the environmental bodies credit scheme, which comprises several organisations set up specifically to receive the money and disburse it to good causes. Those causes are specified under the scheme in six headings, which, roughly, are land reclamation, reduction of the effects of pollution on such land, research and development into sustainable waste management, the provision or maintenance of a park or similar amenity if it is in the vicinity of a landfill site, the restoration of a building for religious worship if it has an environmental connotation, and administrative services to other environmental bodies. Strikingly absent from that list is any provision for money for recycling, an omission that has been rectified only now, four years after the commencement of the scheme.
We may ask ourselves who carries out the overwhelming amount of recycling, and the answer would be the local authorities. They also have to pay to put their waste into landfill sites, and the more that the tax goes up, the more that they will pay. They will pay from the same legislatively limited revenue funding as they might otherwise use for the promotion and extension of recycling, which is one of the aims of the 250WH landfill levy in the first place. We have established that they cannot recover money for recycling from the environmental bodies credit scheme, because that was not included in the six headings and has been added only recently.
We might think that matters would be different now that the rules have been changed to include recycling, but that is not so. The rules state that only registered environmental bodies can receive money from the 20 per cent. of the tax under the terms of the environmental bodies credit scheme. To date, 1,200 such bodies have been registered with ENTRUST, a private company limited by guarantee, which regulates the scheme. However, if they are to register, the bodies have to be certified as not being controlled directly or indirectly by a local authority or a landfill operator.
Local authorities are therefore organised out of getting their hands on any proceeds of the tax. The most that they can do is attempt to press the case or otherwise support one of the registered environmental bodies to obtain money locally that might support the environmental objectives that they find increasingly difficult to sustain by themselves. Hampshire county council and the city councils of Portsmouth and Southampton made a joint submission to the Environment Sub-Committee inquiry in which they estimated that 20 per cent. of their waste management budgets went simply on landfill tax.
The same restriction does not apply to the landfill operators. They have set up, as a vehicle for the distribution of the tax forgone, a number of environmental trusts, supposedly at arm's length from the landfill companies, which are empowered to make the decisions on how to distribute the money. Furthermore, landfill companies can claim a tax credit of up to 90 per cent. of their contributions, so only 10 per cent. of the money that goes into the environmental trusts is real money donated by the landfill company.
A bizarre twist then arises. ENTRUST authorised landfill companies to raise the other 10 per cent by soliciting so-called third party contributions—another organisation would pay the money on behalf of the landfill companies, but, curiously, the landfill company can continue to claim tax relief on the money as if it had paid it. So the landfill company may appear to have donated, for example, £100,000 to an environmental trust, but in reality it gains around £3,000 net from the process.
Notwithstanding that, the landfill companies exercise substantial control over the environmental trusts into which taxpayers' money goes. Thus, Cory Waste Ltd. has an associated environmental trust, Cory Environmental Ltd., the Onyx Environmental Group has the Onyx Environmental Trust and so on. It is, therefore, not surprising that the pattern of allocation of funds between the various headings shows that 55 per cent. of all funds go to just one category—category D—covering the provision or maintenance of amenities in the vicinity of landfill tips. It is as if the board giving out lottery grants consisted of the shops selling the lottery tickets, convened area by area, and empowered to provide community centres down the road with the name of the relevant sweetshop on them.
I am not blaming the landfill companies. They are rational businesses and will do what is best for their businesses. They have found that they can appear to be 251WH positive stewards of the environment and can secure greater acceptance of their landfill sites in particular locations by showering the vicinity with environmental goodies, using our money to do so, and all quite legally. I do not blame the landfill companies for seeking to offset their 10 per cent. contributions when many hungry organisations can see the sense of seeding the pot with a relatively small sum to secure a far greater amount in grant for a cause that they favour. That motivation is especially strong for companies that were excluded from the carve up because of the way in which the scheme was set up. It is no surprise that many local authorities have contributed the additional 10 per cent. on the understanding that a project that they favour will receive funds from the environmental trust.
I cannot blame local authorities for doing that because it is a rational response to the irrational set of circumstances in which they find themselves. What is peculiar is that there is no published register of third-party contributions, so the public cannot see who has put in the additional 10 per cent. and to what extent it correlates with the award of grants. What is even more peculiar is that, until last autumn, even ENTRUST did not know the identities of those contributors. That has changed to a limited extent in response to a recommendation of the Select Committee on the Environment, Transport and Regional Affairs that a register be made public. The Government stated that changes in the 1999 Budget rules would introduce a
new requirement that ENTRUST be notified of the identity of third parties. This will enable ENTRUST to be satisfied that no benefit arises from the contribution. The Government sees no need to go further by requiring that a public register be kept.That is the final piece of strangeness. Why do people give unsolicited contributions of 10 per cent. of the cost of the liability of the landfill company if it is not to secure some benefit? Is there any reason, other than occasional and breathtaking philanthropy, for apparently anonymous donations to be used by landfill companies as if the money had originated with them?All in all, it does not surprise me that there are occasional excesses and self-serving use of the money, as shown by the example unearthed by The Guardian of a supposed experimental environmental road which—well, I never—led to a landfill site and was used only by lorries going to and from that site. I am surprised that things are not much worse. It is perhaps to the credit of the bodies regulating the scheme, and of the landfill companies on the whole, that a scheme that almost seems set up to be abused in most cases has not been. The loser in all this is the prime objective of the tax—to promote a more sustainable approach to waste management, in which less waste is produced and more is recovered or recycled.
Dozens of churches have been restored, hundreds of parks laid out and scores of contaminated sites remediated and landscaped. That is all very good, but are they squarely in the front line of the stated objective of the tax? At some stage, logically, we will run out of churches, parks and ancient household waste tips in the vicinity of landfill sites. What will we do with the money then?
It is high time for a fundamental review of the way in which the scheme is constructed. It is not that it has not done good: it has. It is not that it is hopelessly corrupt: 252WH it is not. It is simply that it is badly set up and its results are far from being what they could be if it were differently conceived.
We should start with some simple building blocks. I have three suggestions. First, the money should be handed over as a tax obligation to an independent organisation for consideration and distribution; secondly, the key terms of reference of this organisation should be the original aims of the tax; thirdly, a portion of the money made available should be set aside for a local authority challenge fund to assist with investment in recycling and reuse at local level, which is vital if waste is to be diverted before it enters the stream that leads to landfill. Those three simple rules could transform the way in which we administer and distribute the income from this most worthwhile of taxes.
§ The Financial Secretary to the Treasury (Mr. Stephen Timms)I congratulate my hon. Friend the Member for Southampton, Test (Dr. Whitehead) on securing this debate. I know that it is a subject that he has followed with great interest over a long period.
I agree with him that the landfill tax is a worthwhile tax. The Government are committed to reducing the environmental consequences on land of the way in which we dispose of waste. I very much welcome this opportunity to discuss the role that the tax plays in helping us to achieve that aim.
The tax was introduced on 1 October 1996 and, as my hon. Friend said, had predominantly environmental objectives. I agree that it has done much good. It forms a key element of the Government's waste strategy, with its aims of recovering the environmental costs of landfilling and encouraging waste producers to consider more environmentally friendly alternatives to landfill such as waste minimisation, reuse and recycling. There are two rates of tax—a lower rate of £2 a tonne on inert waste, such as soil and stone, and a standard rate of £11 a tonne on active waste, including household waste, which has a greater potential to pollute the environment.
The tax is already having a marked impact on waste management practices, but we want it to have a greater effect. Therefore, in the 1999 Budget the Chancellor announced that the standard rate would be increased by £1 a tonne each year, with a review in 2004. The first of those increases has just taken place. This escalator will encourage greater diversion from landfill and will allow waste producers and managers to plan future waste management effectively. It also represents a prudent approach, because it allows us to measure the effects of the increases in tax and the tax's performance before we decide on a longer-term strategy for the rates that should be applied to the tax.
We need to keep an eye on the way things are going, to make sure that the landfill tax is achieving its objectives. That is why we carried out a major review of it, which was reported at the March 1998 Budget.
My hon. Friend referred to recent allegations of fraudulent abuse of the landfill tax and the environmental bodies credit scheme. We take any allegations of abuse extremely seriously. For example, Customs and Excise and ENTRUST uncovered last year, in the course of ENTRUST's enforcement work, 253WH serious allegations of misuse of scheme funds, which are under investigation by the Serious Fraud Office, and Hertfordshire police have made seven arrests. Customs and officials at the Department of the Environment, Transport and the Regions have now also received the 85-page dossier prepared by The Guardian following its investigations. Those allegations are being examined carefully, but I cannot respond to the conclusions and recommendations until the examination is complete. However, I want to comment in general on some of the issues raised by the dossier and by my hon. Friend.
On the environmental bodies credit scheme, which was introduced at the same time as the tax, landfill site operators who contribute to approved environmental bodies can, as my hon. Friend said, reclaim 90 per cent. of their contribution as a tax credit, up to a ceiling of 20 per cent. of their landfill tax liability. A contribution can also be generated by third-party contributors who fund favoured environmental projects through an operator. The scheme supports projects that improve local communities around landfill sites, reclaim brownfield land, or support research into, and education about, more sustainable waste management.
Since its inception, the scheme has raised about £250 million, which has been handed over to the environmental bodies. As my hon. Friend said, about £90 million of that sum has so far been spent, and we need to ensure that the apparent lag does not continue for too long. The amount that is handed over and the amount that is spent must match reasonably closely. At the moment, the scheme costs the Treasury about £80 million a year in forgone revenue, and is regulated by ENTRUST, to which my hon. Friend referred.
A number of changes were made to the scheme from 1 January. As my hon. Friend noted, recycling was explicitly added to those research projects that can attract funding, thereby creating a new category that covers market development for recycled products. The Government want to encourage greater spending in those areas. How and when operators can claim credits was simplified, and the scheme's rules were changed to make it clear that third-party contributors cannot benefit from projects that they fund.
A main aim of the tax credit scheme is to involve the private sector in supporting environmental projects, so it is not surprising that industry should be involved in how the money is spent. However, a contributor is not allowed to gain a direct benefit from a donation. A contributing operator or other third party who wants to finance an environmental project may benefit only in a general sense—for example, through improved standing in the local community or publicly available research.
To help prevent "direct benefit", operators cannot control those environmental bodies that receive their contributions. However, there is nothing to prevent operators from influencing bodies to which they donate. Indeed, in respect of large donations, Customs and Excise recommends that operators have such an influence, or that they at least take a close interest in the project, so that they can ensure that the money is properly spent. Customs and Excise has told me that it will seek repayment of tax credits from any operator who fails to take such precautions, and whose contributions are subsequently mis-spent.
254WH Of course, all manner of influences may help to determine where and how contributions are eventually spent. Foremost is the landfill site operator, but other influences include local communities around landfill sites, third-party contributors, customers of operators—including local authorities—and specialist advisers such as non-governmental organisations. We see nothing wrong in that, so long as contributions are spent on approved objects and contributing people or organisations do not benefit directly.
As regulator of the environmental bodies credit scheme, it is the job of ENTRUST to ensure that the money is properly spent by environmental bodies, and that no direct benefit passes to contributors. Customs and Excise, which audits ENTRUST's performance to ensure that it meets an acceptable standard, is satisfied that ENTRUST now has appropriate systems in place to identify abuses and revoke non-compliant bodies. Those are the mechanisms and systems that led to the arrests to which I referred. ENTRUST has carried out about 500 assurance visits since the scheme's inception. ENTRUST cannot guarantee that no fraud or abuse is taking place within the scheme, but Customs and Excise has assured me that ENTRUST is fully investigating the new allegations and will report to it on its findings. The Government will carefully consider any concerns that arise from that report. I note my hon. Friend's point about public access to the register of third-party bodies.
My hon. Friend would like more funding for local authorities to help with investment in plant and equipment to recycle more household waste and divert more waste from landfill. The case for such additional expenditure will of course be considered as part of this year's spending review, because recycling and support for recycling is a call on mainstream Government spending. Recycling schemes have to be considered in the round, alongside other priorities such as health and education.
I point out to my hon. Friend that if the cash that can currently be credited to those who pay landfill tax were to become instead a fund directed by the Government, it would count as public spending, whereas the existing scheme does not. That spending would need to be contained within the envelope of total public spending, which has already been announced for the next three years. My hon. Friend's proposal would therefore lead to reduced spending on recycling, which is contrary to his intentions. However, if the organisation were to be independent of the Government, and managed a portfolio of projects, and landfill tax payers chose where their credits were directed within that portfolio, it might not count as public spending. That is an interesting idea that I should like to consider further, and I am grateful to my hon. Friend for raising it. However, I caution him that if, as he suggested, some of that money was then handed to local authorities, it would certainly count as public spending. That reinforces my point that the real decisions concerning public support for recycling must be taken in the context of the spending review.
I have not yet worked out how it is possible for a company to donate £100,000 to an environmental body and find itself £3,000 better off at the end of the transaction, as my hon. Friend suggested. If he has any examples, I would be keen to see them.
255WH The Government would like more environmental bodies to support more local authority recycling projects. We are considering ways of improving the performance of the scheme by encouraging contributors to target their funding at more strategic projects. We have expressed the view that more of the available money should go into sustainable waste management, such as waste minimisation, reuse, recycling and the development of markets for recycled products. Officials are working with the waste management industry, ENTRUST and environmental bodies to develop guidelines to achieve that.
I turn to activities that are exempt from waste management licensing. Landfill tax applies only to waste disposal landfill sites that are licensed under environmental law because that activity has the environmental cost that the tax was designed to recover. Some activities involving the recovery of inert waste are exempt from waste management licensing, provided that they comply with the terms of the exemption and do not endanger health or the environment. The recovery of waste under those exemptions from licensing can include the construction of roadways, buildings and recreational facilities such as golf courses.
The "Dispatches" television programme on 6 April blamed the alleged abuses of the exempt activities regime and illegal fly tipping on the desire to avoid paying landfill tax. However, in one of the cases shown, in which the waste came from a contaminated brownfield site, the disposal would probably have qualified for exemption from landfill tax under the 256WH contaminated land exemption if it had been taken to a licensed site. In another case, the waste, if taxed, would have attracted only the lower rate of £2 per tonne.
The Government, recognising that the tax was leading to a serious shortfall in suitable inert waste for restoring landfill sites and filling quarries, introduced an exemption from tax for waste used for such purposes from 1 October last year. It is therefore difficult to see how the tax promotes the illegal dumping of inert waste.
§ Dr. WhiteheadWill the Minister give way?
§ Mr. TimmsI do not think that I can, given the time. I apologise to my hon. Friend.
The Government take very seriously illegal dumping and the abuse of licensing exemptions, which are criminal offences. I remind hon. Members that my right hon. Friend the Minister for the Environment announced to the House on 18 April that he is reviewing the two waste licensing exemptions that are subject to allegations of abuse—those covering recreational facilities and the improvement of agricultural land. There will be a consultation paper setting out the proposed changes to the current exemptions.
I look forward to the debate on the operation of the tax and to hearing the views of hon. Members on how we can best use the tax and credit scheme to achieve national waste policy objectives and create a more sustainable waste management system. My hon. Friend will be an active and particularly well-informed participant in that debate, but I suggest that the case for proposals such as that which he made today for a local authority challenge fund for recycling projects will be considered primarily within the spending review 2000.