The Treasury has agreed to review its decision to make local authority trade waste collections VAT exempt if it is proven there is a “distortion of competition beyond a negligible scale” between the public and private sector, claims the Environmental Services Association (ESA).
Following talks with the Treasury, the ESA is now working to provide evidence proving that the VAT exemption has and will distort the market.
Action follows the Treasury’s move in March, when it wrote to local authorities explaining that their trade waste collections were no longer taxable. This is due to the Principal VAT Directive which states that local government authorities should not be taxed on activities where they engage as a public authority.
ESA economist Jacob Hayler said: “The Principal VAT Directive also states that VAT should be treated equally unless there is this competition distortion. Currently, the HMRC believes the unequal treatment given to local authorities for commercial waste collections will not lead to a distortion of competition. But from the industry’s point of view, if a local authority has a 20% price advantage it unequivocally lends itself to market distortion.
“Discussions with the Treasury are ongoing. We do have a few specific examples of local authorities changing their behaviour since the decision but the problem is, it has only been a few months since the change was made, so we may need a longer timescale to provide robust, detailed evidence of the market distortion. In the meantime it remains a grave concern.”
It is hoped a recent draft report on the future of VAT presented to the Committee of the European Parliament may clarify the situation. It states that, since VAT is a final consumption tax, businesses should not bear the burden of the VAT. It also points out that Member States should ensure that in principle all commercial transactions are taxed as far as possible and that any exemptions are construed narrowly, while also ensuring that similar goods and services are subject to the same VAT treatments.
Explaining how the difference in VAT may impact on the private sector, trade waste management firm First Mile chief executive Bruce Bratley said: “Some central London councils have a trade waste market share in excess of 50% for waste services. Now they don’t have to pay VAT there is opportunity for them to expand further, which is completely unfair. It’s just not a level playing field and it’s hugely anti-competitive.”
Paper Round director Bill Swan commented: “Most businesses are VAT registered and therefore can reclaim any VAT that they are charged. The change makes no difference to them. However, very small companies or organisations that can’t reclaim VAT will clearly save 20% VAT by using local authority rather than private sector waste providers.”
Trade waste management companies are concerned that local authorities will use the change in tax to sell their services and potentially mislead customers. Swan explained: “We have already seen Veolia salespeople working on behalf of Westminster Council trumpeting the fact that they are zero VAT rated, even to VAT registered clients for whom clearly it makes no difference. My concern is that Council salespeople will mislead customers who are confused about the VAT rules and persuade them to switch.”