Apparently, Ronald Reagan once said, “If you want more of something, subsidize it; if you want less of something, tax it.” This principle has been applied many times, from discouraging tobacco and alcohol consumption, to encouraging research and development into cutting-edge technologies. It’s never more appropriate when policy makers are considering the environmental strand of the ESG agenda. As an example, how many of us no longer use single-use carrier bags?
The newest ‘environmental tax’ in the UK is the plastics packaging tax (PPT), coming into force from 1 April 2022. The core facts of this tax are clear:
Due to the PPT’s broad scope, it will affect a wide range of businesses.
There are a number of potential exemptions from the PPT, as set out in HMRC’s recently released guidance. But even if this applies to your business, there may still be record keeping and reporting requirements.
A particularly difficult element of the rules is the treatment of importers. UK companies importing goods from overseas may be required to gather information on packaging content from their suppliers, and becoming the 'liable company' for taxable plastic in their packaging.
We’ve had multiple conversations with our clients on the operation of the PPT, and it’s clear that the practical application of it will be complex. There are three main questions that keep arising:
Clients who are clearly affected by PPT started thinking about its impacts early. Initially, because the word ‘tax’ is in there, the tax and finance functions were handed the reins. However, the teams quickly realised that analysis of its impact, and the implementation of any changes in behaviour, should be ‘business led’.
The purpose of PPT is to encourage the use of recycled plastic in packaging, where plastic is necessary. Therefore, PPT is essentially an operational issue, and needs to bring together procurement and quality teams with input on systems and tracing. Early indications are that it's much more efficient to ask a member of those teams to own the PPT response. Tax can focus on feeding technical support in and taking questions to HMRC and other advisers, perhaps around grey areas in what ‘recycled content’ might mean in practice for a particular business.
The business liable for PPT is either the one that manufactures the plastic packaging component in the UK, or the business that imports it into the UK. Businesses are therefore considering if they should bear this cost or pass it on to their customers.
While it's a business decision whether the cost of PPT should be passed on to customers, the purpose of it is to increase the use of recycled plastics. Therefore, businesses are encouraged to make the tax that they have paid visible to their business customers, and then work with them where possible to try and increase the amount of recycled plastic used.
HMRC’s original guidance required that from April 2022 a statement be included with the invoice for the packaging that PPT had been paid. However, HMRC has now delayed this requirement, stating that further information will be published in due course. The complexities of actually including such a statement on an invoice are recognised and HMRC will now allow more time for businesses to prepare and make any required changes to invoicing systems.
The international overlay is potentially hugely difficult for complex supply chains. Other countries have already announced or introduced their own versions of the PPT, all with differences to each other.
EU member states seem to be furthest ahead generally. For example, Spain and Italy’s versions are slated to be introduced from January 2022, and they do bear some similarities to each other.
However, there are differences in definitions and scope with the UK PPT, which will potentially force multinationals with complex supply chains to run parallel or overlapping systems to track, record, file and ultimately change behaviours and buying patterns.
There is no simple answer to dealing with this issue. We've found that only by getting into the detail of supply chains within individual businesses can we start to understand the potential impacts. Brexit forced many groups to understand UK-EU supply chains in much more granular detail, and some of that information will be useful as a starting point in assessing the impact of PPT, and then deciding on any changes to behaviour.
Single-use plastics are not the only target of 'behaviour changing' environmental taxes. Carbon emissions around the world were the main focus of discussions at COP26, and countries have adopted different approaches to it. Many (including the UK) have energy trading schemes, while other countries are also introducing targeted or wide 'carbon taxes'.
Just like the overlap of different versions of PPT, the future implementation and overlap of different taxes (and incentives) regarding carbon and other negative externalities will require detailed analysis and modelling as part of business-led change projects.
There was a lot of hope attached to COP26, but it remains to be seen what alignment there will be on the direction of travel across the world. Hopefully, the summit will prove to be successful, but we don't anticipate alignment on tax policy internationally any time soon.
HMRC has recently released detailed guidance on PPT and have been running introductory and technical webinars in October and November. If you have been unable to attend a webinar we encourage you to listen to the recordings.
HMRC has also recently shared draft secondary legislation for the technical consultation which closes on 1 December 2021. The draft legislation published provides the technical detail relating to administration of the tax, such as registration requirements, filing returns, record keeping and evidence. These and all the consultation documents are available here.
For more information and guidance on the UK plastic packaging tax, contact Daniel Rice.