Waste disposal: site preparation: memorandum of understanding
WASTE INDUSTRY MEMORANDUM OF UNDERSTANDING
METHODOLOGY FOR THE PREPARATION OF CLAIMS REGARDING LANDFILL SITE ALLOWANCES (S142 CTA 2009/S165 ITTOIA 2005 (FORMERLY S91B ICTA 1988)) AND LANDFILL CELL ALLOWANCES IN RESPECT OF LANDFILL ASSETS ENGAGED IN THE WASTE INDUSTRY
AGREEMENT DATE : 2 March 2010
(FOR ACCOUNTING PERIODS COMMENCING DURING OR AFTER March 2008)
MEMORANDUM OF UNDERSTANDING
|From||:||Environmental Services Association (ESA)|
|To||:||HMRC, West Midlands Large Business Service|
METHODOLOGY TO BE ADOPTED BY THE WASTE INDUSTRY IN PREPARING AND SUBMITTING CLAIMS FOR ALLOWANCES IN RESPECT OF LANDFILL SITE CAPITAL EXPENDITURE RELIEF S142 CTA 2009/S165 ITTOIA 2005 (formerly S91B ICTA 1988) AND LANDFILL CELL EXPENDITURE RELIEF
The attached methodology has been compiled as a framework for allocating and claiming tax allowances with respect to landfill expenditure, particularly expenditure on landfill site infrastructure (whole site expenditure), and expenditure on landfill cells as incurred by the waste industry.
The ESA have agreed (subject to acceptance by HMRC) to adopt the methodology as set out in the attached Procedure Manual for accounting periods commencing during or after March 2008 and to consult with HMRC pragmatically in respect of earlier open years on a case by case basis.
A R HOOPER
ESA Tax Working Group
PROCEDURE MANUAL: METHODOLOGY FOR ALLOCATING EXPENDITURE BETWEEN LANDFILL WHOLE SITE COST AND LANDFILL CELLS FOR THE CALCULATION OF TAX ALLOWANCES IN THE WASTE INDUSTRY
1.1 To provide a methodology for the waste industry to adopt in allocating expenditure (capital or revenue) between landfill whole site and landfill cell costs for the calculation of tax allowances.
1.2 The intention is for the methodology to be agreed and adopted by the UK waste industry companies and HMRC for accounting periods commencing during after March 2008. Open corporation tax accounting periods prior to the agreement to be agreed with individual companies pragmatically on a case by case basis.
1.3 Any landfill expenditure categories not included in this methodology, and not covered elsewhere within existing tax legislation, will be subject to negotiation with HMRC as soon as possible after being identified, with a view to agreeing the tax treatment in a timely manner.
2. LANDFILL WHOLE SITE EXPENDITURE
2.1 Capital expenditure on landfill sites is allowed for tax purposes under S142 CTA 2009/S165 ITTOIA 2005 (formerly S91B ICTA 1988) ie whole site expenditure incurred for the enduring benefit of the landfill asset over its entire economic life, such expenditure to be claimed as tax allowances in proportion to the landfill void consumed over the life of the landfill.
2.2 Typical whole site capital expenditures associated with landfill site development, preparation and infrastructure construction are listed in Appendix A paragraph 1. Such capital costs are capitalised as fixed assets on the balance sheet and depreciated, as the landfill’s capacity of void is consumed over its economic life.
2.3 Landfill void utilisation and remaining landfill void capacity will be calculated from the company’s own engineering records.
2.4 Extensions to landfills - each material extension to a landfill site will be treated for tax purposes as a new landfill asset from a S142 CTA 2009/S165 ITTOIA 2005 (formerly S91B ICTA 1988) perspective. A material extension is defined as the issue of a new licence/Environmental Permit in addition to an existing licence/Environmental Permit.
2.5 For the avoidance of doubt the waste industry will adopt a policy of reducing the remaining balance of void space for the life of site tax allowance calculations to zero rather than suffer an abortive capital cost due to early, permanent unplanned closure. In essence any residual balance of tax allowances unused at time of closure will be allowed for tax purposes, but the company will make every attempt to have spread the claim for these expenditures over the economic useful life of the site. When closure is planned to be temporary with reopening at a future date, (“mothballing”), the balance of the remaining void space will not reduce to zero, but remain at the preclosure amount until tipping recommences.
2.6 All landfill or cell - based expenditure that qualifies for mainstream capital allowances will be excluded from S142 CTA 2009/S165 ITTOIA 2005/cell relief and claimed separately. Appendix A lists examples of expenditure which may qualify as plant and machinery.
2.7 Unrelieved S142 CTA 2009/S165 ITTOIA 2005 (formerly S91B ICTA 1988) capital expenditure balances are permitted to be transferred intra-group upon an intra-group transfer of landfill assets consistent with S142 CTA 2009/S165 ITTOIA 2005 (formerly S91BA ICTA 1988).
2.8 As discussed in the next section, cells with a planned life greater than 2 years will be treated as whole site life costs for the purposes of S142/S165. Consequently, the qualifying gross spend could increase as the landfill is consumed including the final year whilst the remaining landfill void would always be reducing and conversion to zero by the final year. It is accepted that the shape of the S142/S165 claim curve may well be uneven by virtue of qualifying spend being added in over the life of the landfills.
2.9 A template for waste industry members to adopt in respect of S142 CTA 2009/S165 ITTOIA 2005 (formerly S91B ICTA 1988) claims is attached as Appendix B and is available to ESA members in Excel format upon request.
3. LANDFILL CELL EXPENDITURE
3.1 Landfill cell expenditure can be distinguished from whole site expenditure as a function of its use and location. Typical costs attributable to each are referred to at Appendix A paragraph 2. In simple terms landfill whole site expenditure is incurred to prepare the total landfill site to receive waste streams far into the future, dealing with all the necessary environmental, planning, logistics and other regulatory design issues for the whole site, whilst landfill cell expenditure is incurred to permit receipt of waste within a particular area (or cell) of the site for a much shorter period, of, normally less than 2 years.
3.2 Expenditure incurred to prepare a landfill cell that is expected to have a planned life of less than 2 years represents revenue spend for tax purposes (even though capitalised for accounting purposes). This expenditure will be relieved for tax purposes as the cell is utilised (or filled) by the receipt of waste, by claiming depreciation over the life of the cell.
3.3 Expenditure on cells with a planned life of more than 2 years will be treated as whole site expenditure and will be relieved by adding the cost to the relevant landfill S 142 CTA 2009/S165 ITTOIA 2005 (formerly S91B ICTA 1988) to the residue of spend and therefore in essence relieved over the remaining life of the landfill.
3.4 Cells with a previously planned life of less than 2 years but where the actual life exceeds 2 years will be re-allocated in the next Corporation Tax computation following identification of the change. See 3.7 below.
3.5 For this purpose life of a landfill cell is taken to mean period between:
date of first tip of waste
date of last tip of waste
3.6 For the avoidance of doubt, the actual date of the last tipping of active waste is to be taken as the final cell completion date when computing anticipated cell life and actual cell life. The creation of a new cell by removing the capping of a previous cell constitutes the commencement of a new cell for these purposes. An example of how this occurs in engineering terms and chronology is attached as Appendix C.
3.7 The landfill cell claim methodology relies on not having to re-open earlier years’ corporation tax computations where it becomes apparent that the anticipated life of a cell was not as planned (ie, where the actual cell life exceeds 2 years, although the cell was planned to remain active for a shorter time). The conversion to a life of more than 2 years will occur in the Corporation Tax computation for the year in which the change becomes known. In these circumstances the tax relief already claimed on the cell expenditure will be added back and replaced with a S142/S165 claim based on the whole site void taking into account the void filled The cell will, from then on, cease to be allowable for cell tax relief. An example of this is included at Appendix D.
3.8 For the avoidance of doubt the proposed claim procedure in respect of cells with a life of less than two years will be:
a) Tax allowances for cell expenditure will be based on the accounting depreciation charged in respect of relevant expenditure in developing and constructing the cell in question calculated on total cell usage compared to total void for the cell,
b) Where it is not possible to compute the tax allowance in accordance with a) above because the depreciation policy does not identify individual cells as depreciable assets an estimate will be made from composite depreciation charges.
APPENDIX A: ACCOUNTING TREATMENT OF EXPENDITURE ON LANDFILL VOID ASSET
Engineering fixed assets are divided into two principal categories; Whole Site Costs and Cell costs. Each is depreciated over the asset’s relevant life in line with proportion of void utilised.
1. EXAMPLES OF LANDFILL WHOLE SITE COSTS
Examples of costs that would normally be regarded as Whole Site Costs and which are considered eligible for preparation relief under S142 CTA 2009/S165 ITTOIA 2005 (formerly S91B ICTA 1988) are given below:
- Planning costs and fees
- Landfill engineering, not associated with specific cells
- Perimeter fencing
- Leachate treatment infrastructure
- Professional fees (e.g., surveying, licence modifications, planning, legal, ecological and environmental assessments)
- Main haul roads and hard standing areas
- Concrete pads
- Surface and ground water management systems, including collection infrastructure, ditches and lagoons
- Waste Management Licence / PPC Permit modifications including associated fees
The above list is for illustrative purposes only and may not include all items which may be included in a claim under S142 CTA 2009/S165 ITTOIA 2005 (formerly S91B ICTA 1988).
2. EXAMPLES OF LANDFILL CELL EXPENDITURE
Examples of costs that would normally be regarded as Cell costs which are regarded as revenue expenditure in this memorandum, provided the life of the cell is less than two years, are given below:
- Design work, planning applications, environmental consultancy studies, CQA approvals associated with an individual cell’s planning and construction
- Landfill engineering (excavation, preparation, mobilisation costs, materials import, earth moving, membrane material, CQA and other planning or permitting) associated with cell construction such as cell wall engineering, bunds, base preparation and leachate drainage layers
- Access roads which relate to a specific cell only
- Cap stripping
The above list is for illustrative purposes only and may not include all items which may be included in a revenue expenditure claim.
The allocation between site costs and cell costs requires judgement in certain cases. For accounting purposes the classification is principally determined by the anticipated economic ‘life’ of the asset to which the cost relates, i.e. whether the life is long (whole site life) or short (cell life). This principle, subject to the specific exceptions outlined in this memorandum, will generally satisfy the criteria for claims as either revenue or site preparation relief.
All of the above costs (whether site or cell) are principally concerned with the development of the landfill site, which will enable the acceptance and deposit of waste. In addition to this type of expenditure a landfill site will require investment in other assets which are accounted for separately and may or may not qualify for tax relief other than that described above. In many cases these assets are separable from the infrastructure of the site or they have a depreciation profile which does not match that of either a cell or the site.
Examples of such assets are given below:
- Mobile plant (compactors, cranes, tractors, bulldozers etc.)
- Weighbridge (comprising a weighing platform and associated ‘office’ which is normally a portable building)
- Incidental plant & equipment (compressors, jet wash, pumps, trailers etc.)
- Site vehicles
- Storage tanks & fuel bowsers
- Litter fencing
- Overland pipework and pumps for gas collection*
- Infrastructure, pipework, drilling, inspection chambers, required to manage the specific cell’s leachate and gas control, including the creation of links to the site’s central infrastructure*
Offices, storage buildings, composting and sorting pads**
- Where pipework and other infrastructure is installed during construction of the landfill cell or site and the individual cost is included within the overall cost of the project it may well be included within whole site or cell development costs for accounting purposes. However, their cost must be separated for the purpose of computing the relevant tax allowances (plant and machinery in this instance). Subsequent infrastructure works, which may well occur after the cell has closed will normally be treated as a separate project and for accounting purposes, will be depreciated over their expected useful life for accounting purposes and classified according to normal rules for tax computation purposes
** Buildings should always be distinguishable from other developments on a landfill site and will be depreciated over their expected life.
Most of these ‘other’ assets will qualify in whole or part for tax relief in the form of Capital Allowances.
APPENDIX B: LANDFILL SITE AND CELL EXPENDITURE
|Year expenditure incurred||Taxation relief under S142/S165 and cell relief|
|Site||Cell # 1||Cell # 2||Cell # 3|
|Cubic m||Cubic m||Cubic m|
|Void used in period|
|Site||Cell # 1||Cell # 2||Cell # 3|
|Cell(s) as revenue|
|Cell(s) as capital|
|Year expenditure incurred||Summary of relief claimed under S142/S165 and cell relief|
|Site||Cell # 1||Cell # 2||Cell # 3|
|Residue of cost|
APPENDIX C: CELL ENGINEERING AND CHRONOLOGY EXAMPLE
- This example illustrates how cells can be constructed, consumed, capped, re-opened for new cell engineering and final capping.
|Final capping Yr 5|
|Intra site capping||Cell 1||Cell 2||Cell 3||Re-opened end of Yr 3 for Cell 4 filling|
|Yr 1||Yr 2||Yr 3|
- For the avoidance of doubt the above diagram shows 4 separate cells for tax purposes. It is possible that any one or more cells could have an anticipated or actual life of more or less than 2 years.
- Cell 4 is a cell in its own right even though its floor is created by removing the intra site ceiling from Cells 1, 2 and 3.
APPENDIX D: EXAMPLE OF TAX RELIEF WHEN CELL WITH ANTICIPATED LIFE OF TWO YEARS OR UNDER EXCEEDS TWO YEARS
- year end – 31 December
- anticipated cell life – 2 years, first tip 1st May
- actual cell life – 3 years 6 months (ascertained in 3rd accounting period )
- anticipated and actual cell cost - £2m
|Year 1 (expected 2 year life)|
|Cell depreciation claimed - 8 months/24 months x £2m||0.6|
|Year 2 (expected 2 year life)|
|Cell depreciation claimed - 12 months/24 months x £2m||1.00|
|Year 3 (expected 3 years 6 months life)|
|Add back Cell claims to date||(1.66)|
|Claim site preparation claim under S142 CTA 2009/S165 ITTOIA 2005 (formerly S91B ICTA 1988) calculated on whole site void including claims for years 1, 2, and 3.||0.20 (est)|
|Year 4 onwards|
|S142 CTA 2009/S165 ITTOIA 2005 (formerly S91B ICTA 1988) claim based on whole site void.||0.10 (est)|