The dispute involved disagreements over the correct application of complicated, new landfill tax rules introduced in 2015, and discrepancies in how some waste was recorded. Landfill tax is charged at two rates depending on the type of material. During the periods affected by the dispute, the standard rate of landfill tax was between £82.60 and £86.10 per tonne, while the lower rate was between £2.60 and £2.70 per tonne.

HMRC argued that soil, which was normally charged at the lower rate, should have been charged at the higher rate due to ‘administrative’ failures in how the material was treated when received at site.

HMRC considered that the material was subject to additional compliance testing due to its properties, whereas the Council did not consider that the compliance requirements were applicable.

Cardiff Council was one of a number of operators and public bodies facing enquiries and landfill tax assessments from HMRC on this issue (HMRC collects £1bn in unpaid tax from landfill tax investigations   - Accountancy Age).

The full disputed amount was initially £35.3 million in unpaid landfill tax. Penalties brought the total liability to nearly £45 million – interest on this amount which would have been due depending on when payment was made is not included in this figure.

Following negotiations over several years a final in-principle settlement sees the council facing a £12.3 million bill in unpaid landfill tax and approximately £3.9 million in interest. This means the Council’s liability will be reduced by at least £28 million in unpaid tax and penalties, and considerably more in any interest that would have been due.

At its next meeting on Thursday, September 26, Cardiff Council’s Cabinet will consider a report recommending acceptance of the settlement with HMRC. The report will also propose a payment method, which will be presented to Full Council on the same day for approval. Additionally, the Cabinet will be asked to approve a recommendation to pursue any outstanding, unpaid landfill taxes following HMRC’s re-categorisation of soil brought to the site.

The issue came to light during a HMRC landfill tax audit in January 2017 and initially related to two companies that brought material to the Lamby Way landfill site. The site was closed in 2015, but soil was needed to help contour, cap and remediate it.

Company A (Bridgend Biomass/South Wales Wood) brought material to the site which was taxed at a lower rate. HMRC disputed the categorisation saying it should have been taxed at a higher rate. This led to a tax dispute, which was eventually resolved at minimal cost to the Council. Details of this settlement with HMRC are confidential, as such we are not able to disclose further information at this time.

Company B (Neal Soils) delivered soil to the site which was charged as unprocessed soil and at the lower rate. However, HMRC maintained that this soil was processed and should have been taxed at a higher rate. The Council argued that the new compliance regulations were ambiguous around how processed soil was defined and treated in order to qualify for the lower rate of tax. There is no suggestion of any impropriety or illegality here, only a dispute over definitions and categorisations.

Faced with the uncertainty of litigation over the interpretation of the soil brought to site by Company B, versus a HMRC settlement offer that substantially reduces the liability, the Council will be recommended to enter into the settlement agreement.

Cllr Chris Weaver, Cabinet Member for Finance, Modernisation and Performance, said the proposed settlement was a “pragmatic decision” that balances the cost of litigation with the risk of paying the full disputed amount. He emphasized the Council’s efforts to address HMRC’s concerns, to reduce the financial fines and penalties, while improving monitoring and practices at council waste sites.

Cllr Weaver added: “Landfill tax rules changed around the time issues arose, and this contributed to the confusion. The materials assessed, and the rules and rates around those materials were not always clear. The landfill tax regime is complex and ambiguous, and this Council is not alone in receiving landfill tax assessments from HMRC. The errors should not have arisen, but since we cannot go back to 2015 and do it differently, our job now has been to resolve this.

“HMRC maintain that soil from Neal Soils was processed and so should have been subject to testing. We disagree, but going to litigation, given its inherent uncertainty could cost us significantly more.

“We have been in negotiations with HMRC over several years. Although this outcome will result in a significant cost to the Council, I understand it may be the best way forward now. The Council is not able to retrospectively rectify the issues that have arisen since we cannot open up the landfill to isolate and carry out testing on the material at issue. Although the council no longer runs a landfill site, the authority has reviewed waste management practices, implemented improved control measures, and worked closely with legal and tax experts to ensure tax regime compliance.

Cardiff Council has never hidden this dispute. It has been noted in multiple reports over the years, beginning in 2018.

Cabinet will take the HMRC settlement report at its next meeting On Thursday, September 26. You can watch a live stream of that from 1pm here Agenda for Cabinet on Thursday, 26th September, 2024, 1.00 pm : Cardiff Council (moderngov.co.uk) where you will also be able to view the full report. If approved Full Council will then take a decision on whether to agree the payment method, which requires an amendment to the 2024/25 budget in accordance with the Budget Policy Framework. You can view a live stream of that meeting from 4.30pm on the day here Agenda for Council on Thursday, 26th September, 2024, 4.30 pm : Cardiff Council (moderngov.co.uk)

Mitigations

The Council also took several significant actions to engage with HMRC and mitigate the landfill tax assessments, including:

1. Appointment of Advisors: The Council appointed PwC as advisors due to their expertise in landfill tax and their past success in reclaiming overpaid landfill tax for the Council. Counsel was also appointed, and their opinion was sought at various points throughout the process. This enabled the Council to secure a settlement offer and a significantly reduced bill to the amounts originally at stake.
2. Senior Management Team Involvement: When the corporate team became aware of the issue in April 2018, they took control of the enquiry and dedicated significant time and resources to collating evidence. This included physically locating a team of five people at Lamby Way for weeks to collate information from thousands of paper documents.
3. Audit Investigation: An extensive investigation was conducted in relation to the receipt of materials. The Council has worked closely with internal audit to address the deficiencies in waste management service controls and to improve weighbridge controls.
4. Litigation and Appeals: The Council filed an appeal to the First-tier Tribunal and made an application for Judicial Review to protect their rights and stress test the position before the Courts. They also made a hardship application to avoid borrowing funds against capital to pay the disputed amount before filing the appeal.
5. Alternative Dispute Resolution (ADR): The Council made an application for ADR and held a mediated meeting with HMRC, during which significant reductions in both the landfill tax assessment and penalties were achieved.
6. Penalty Suspension: The Council agreed to penalty suspension conditions and complied with those conditions, resulting in all penalties being cancelled or withdrawn.
7. Proposed Settlement Agreement: The Council reached a proposed final settlement agreement with HMRC. Under the agreement, the Council would give up all its rights for the matter to be heard in Court.