Head of environmental Angus Evers considers the consequences of a recent Upper Tribunal ruling on whether local authority VAT exemption distorts competition in the commercial waste market.
Any business producing waste needs to have its waste collected and disposed of. To arrange that, it has a choice to either request the local waste collection authority (WCA) to collect its waste, or it can contract with a private waste collection contractor. It is likely that price will be a significant factor in its decision.
Private waste collection contractors are required to charge VAT on their supplies of services to their customers. WCAs are not (as a general rule). Does this give WCAs a competitive advantage over private contractors where they both offer commercial waste collection services in a particular area? This issue was the subject of a recent judgment by the Upper Tribunal, which provides a useful insight into the commercial waste collection market in England and Wales, and the legal basis on which that market operates.
The case started as an application for judicial review by The Durham Company Limited (trading as Max Recycle) against HMRC and HM Treasury, with the Local Government Association (LGA) joining as an interested party in support of HMRC and HM Treasury. It was subsequently transferred to the Upper Tribunal. Max Recycle challenged the lawfulness of the VAT treatment afforded to WCAs carrying out commercial waste collection services, claiming that WCAs should not be exempt from charging VAT on supplies of those services, on the basis that WCAs actively competed with it (and with other private contractors) and the VAT exemption enjoyed by WCAs amounted to a distortion of competition.
The position under EU and domestic law
The tribunal began by analysing the relevant EU legislation contained in Article 13 of the Principal VAT Directive, which states that local authorities are not regarded as taxable persons in respect of activities or transactions in which they engage as public authorities, even when they collect fees, et cetera, in connection with those activities or transactions. However, they are to be regarded as taxable persons in respect of such activities or transactions where their treatment as non-taxable persons would lead to significant distortions of competition. The tribunal then considered the relevant EU case law, which indicated that it was a question of national law whether an activity was to be classified as constituting the exercise of public administrative law, or as private law that applied equally to all economic operators. The case law also indicated that to be acting as a public authority, an authority had to be acting under a 'special legal regime'.
In the domestic context, the tribunal concluded that Section 45 of the Environmental Protection Act 1990 (EPA 1990) was at least capable of being a 'special legal regime', principally because of the duty on WCAs to arrange for commercial waste collections if requested to do so by occupiers of premises and the constraint of making only a reasonable charge resulting only in cost recovery and no surplus.
The tribunal's conclusions
In their evidence, both Max Recycle and the LGA provided examples of different approaches by different WCAs to providing commercial waste collection services, ranging from not operating a service at all, to outsourcing to private contractors, to providing services outside their areas. The tribunal concluded that WCAs supplying commercial waste collection services in their areas in performance of their duties under Section 45 EPA 1990 were engaged in activities as a public authority, but the question of whether a WCA was in fact providing its commercial waste collection services under Section 45 was to be determined on the facts of each case.
The tribunal's judgment leaves private contractors facing competition from WCAs in a difficult position. Although it would, in theory, still be possible to challenge the VAT status of a WCA's commercial waste collection services on the basis that it was resulting in a significant distortion of competition, or on the basis that the WCA was acting beyond its powers in Section 45 EPA 1990, that would have to be done on a case-by-case basis. It is likely that such challenges would be prohibitively expensive for a contractor operating across multiple WCA areas.
The judgment arguably perpetuates a situation in which there is not a level playing field between private contractors and WCAs on the basis of cost. However, the legislation and case law on which the judgment is based need to be considered against the backdrop of Brexit. The position could change in the future as the EU's VAT rules and public procurement rules are scrutinised by UK policy-makers and legislators.
This article was first published in Resource
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.