UK's Plastic Packaging Tax - Key obligations to protect your business and officers

The UK’s Plastic Packaging Tax (PPT) came into force on 1 April 2022, with the aim of incentivising businesses to change to packaging with more recycled plastic content and increase the general level of recycling to support the environment. The government has published several guidance notes to support businesses to comply with the tax and is spending the resources needed to implement and enforce the tax.

This note summarises the key obligations for businesses to understand the scope of the tax, and to mitigate risk and liability.

Background

Scope of PPT

The PPT of GBP200 per tonne is payable by manufacturers (who undertake the last substantial modification of packaging) and importers of finished plastic packaging components (whether or not, filled with goods eg cold drinks) that do not qualify for any of the reliefs.

What constitutes ‘plastic’, ‘plastic packaging components’, and ‘finished’ is defined in the legislation and often requires careful assessment for each component in the packaging. In general it covers packaging products which are finished (ie have undergone the last substantial modification), include more plastic (plastic includes biodegradable, compostable and oxo-degradable plastics) by weight than any other material that is comprised within it and is used for the packaging function in the supply chain of any goods. In addition to this, single-use packaging for use (those not used in a supply chain of goods) but by the consumer for example bin liners, refuse sacks, disposable cups, pouches etc are also covered. Unlike the similar taxes proposed in Italy and Spain, the UK’s PPT is wider in scope as it does not automatically exclude reusable plastic packaging for eg plastic crates used and reused in supermarkets to deliver food.

Exemptions and reliefs are provided for plastic packaging that:

• includes 30% or more recycled plastic content
• is designed to be used for the long-term storage of goods, for eg toolboxes, first aid boxes
• is designed to be an integral part of the goods, for eg water cartridge filters, printers, or toner cartridges, tea bagsis primarily designed to be reused for the presentation of goods e.g., meal trays used on aeroplanes, sales display shelves
• is permanently set aside for a non-packaging use
• is transport packaging on imported goods - often the tertiary packaging eg pallets, pallet wraps, straps
• is used for store on international aircraft, ship, and rail journeys
• is used for the immediate packaging of human medicinal products; and
• is exported outside the UK within 12 months (relief by way of tax deferment until the conditions of direct export are met; or by way of tax credits if the tax is paid initially).

HMRC’s guidance including examples of packaging which is in and outside the scope of PPT is regularly updated and can be a useful starting point. In our experience applying some of these exclusions/exemptions in practice can be subjective and require interpretations. In certain borderline cases, it may even require consultation with HMRC.

Critically, the onus is on the business to prove that it is not liable to pay PPT, otherwise HMRC will assume that it is liable.

Affected businesses

An importer/manufacturer is required to register for PPT if 10 or more tonnes of plastic packaging is imported or manufactured in a 12-month period. This is determined by applying the future test and the historic test. If a business expects to manufacture or import 10 tonnes of plastic packaging in the next 30 days (future test), or if a business manufactures or imports 10 tonnes of plastic packaging in the previous rolling 12 months (historic test), the business should notify its liability to register for the tax. As the tax is applicable from 1 April 2022, the look back period is only until 1 April 2022 for the historic test.

Interestingly, a business is required to register and comply with the tax obligations even if 30% or more recycled plastic is used as a proportion of the total weight of plastic in the packaging. Such recycled plastic will not attract the tax but will count towards the 10 tonnes threshold (along with some other exempt packaging). This places significant compliance and administrative burden even on businesses that otherwise are achieving the environmental aims of the tax.

In practice, however, every business regardless of, sales turnover or profit / loss level must consider its duties regarding PPT as those who are not liable to register will still need to:

• police their supply chains by carrying out due diligence checks on suppliers and / or customers and to test the robustness of the information supplied by them to avoid the possibility of being held secondarily or jointly and severally liable to pay PPT, and
• demonstrate through records/evidence that they are not liable to register because of any relief

Obligations

Compliance

Businesses need to register for PPT online if they reach or expect to reach the registration threshold. Once registered, the business will need to pay tax and submit a PPT return on a calendar quarterly basis by the last working day of the month following the accounting period. The first PPT return under the new legislation is due on Friday, 29 July 2022 for the quarter ended 30 June 2022.

Unlike the position for VAT, where the ERP systems are equipped to provide the necessary financial data to aid the calculation and preparation of the tax returns, special reports will be required by businesses to calculate and report the weight of the in-scope plastic packaging. The weight of plastic packaging also needs to be calculated using the standard methods set out by HMRC. Where the standard methods are not feasible the business will need to agree a special method with HMRC to assess weight.

Also, unlike VAT, which is calculated and separately charged on price of the goods, and is usually recoverable by the customers, PPT is calculated based on the weight of the packaging, is not separately charged to customer on the price and is not recoverable by the customer. PPT contributes to the costs of the goods manufactured/imported. A business that is liable to pay PPT to HMRC on the plastic packaging that they have manufactured or imported, can chose to increase the price of the goods that are sold to the customer to help cover the cost of the tax. This is a commercial decision for the businesses to take. If the business increases the price of the goods to cover the cost of PPT, VAT will be payable on the increased price of the goods sold to the customer.

HMRC has deferred the requirement for businesses to issue invoices including a PPT statement (ie statement indicating the tax paid on plastic packaging). The requirement was deferred considering the difficulties that businesses will face in complying with this requirement, however, HMRC may introduce this requirement later.

Accounts and Records as Evidence

Businesses are required to keep accounts, records and supporting evidence for 6 years (including any measurement of weight) for all the information that it submits on the PPT return. This would include the breakdown weight of the finished packaging that is manufactured or imported with reference to each product line, and how much of it is exported, qualifies for 30% recycled plastic relief, adjustments/corrections, tax credits claimed etc. HMRC also expects businesses to maintain records which include sufficient evidence of any exemptions/reliefs claimed.

HMRC has outlined some examples of records which businesses must keep and the documentary evidence that should be retained to support the exemptions/reliefs in the HMRC guidance on record keeping. However, this is not an exhaustive list and HMRC has essentially left the burden with businesses to prove its sufficiency in the event of an enquiry.

Furthermore, HMRC will expect businesses to undertake their own reasonable due diligence to test the veracity where it relies on a third party’s evidence/statement and retain records of such checks and responses to questions. This can be quite demanding and burdensome for instance for importers where they will need to rely on other stakeholders for evidence (like overseas suppliers and parties further up the supply chain).

Where for example, a relief is claimed because the packaging qualifies for 30% recycled plastic relief, a business would need records that show how the percentage of recycled plastic has been worked out, confirm the source of the recycled plastic, provide sufficient supporting evidence that the recycled plastic was used (including the dates that the components were finished or imported). Further, the supporting documentary evidence can include product specification, contracts, production certificates, accreditations and international standards, quality assurance audits, invoices etc.

Risks of Secondary or Joint and Several Liability

The PPT legislation also introduces secondary liability (for tax unpaid) and joint and several liabilities (for tax that will be due) on persons acting in the course of a related business in supply chains, where they are held to have known or ought to have known that PPT had not been accounted for. A “related business” is not only a business with common control/ownership. It includes unconnected parties in the supply chain or otherwise dealing with the plastic packaging for example a customer, supplier, fulfilment, or marketing service provider. For example, a trader involved in a supply chain where PPT is due will need to consider whether PPT has been paid on the material that they are supplied with by the seller or the manufacturer, otherwise the trader could be held secondarily liable to pay PPT for the packaging purchased for previous periods. HMRC also has the power to nominate a person as jointly and severally liable along with the manufacturer/importer by serving a notice mandating the recipient to be liable for the tax for two years after the notice is served i.e., for future periods. These situations could arise for a related business when the business liable for paying PPT is not paying PPT and/or does not intend to do so.

How to mitigate the risk

Whilst we expect HMRC to exercise caution and consider the factors carefully before serving such notices of liability in practice, these provisions indeed place significant information gathering and record keeping requirements on such other businesses / persons as well, broadening the net of businesses who will be required to conduct PPT due diligence processes and procedures – which HMRC considers sufficient.

With HMRC’s guidance placing the onus on businesses to determine what information should be obtained and how this should be verified by reference to their own supply chains, it will be critical for taxpayers to consider what checks they can start building into their supply chains to meet their obligations, how the robustness of the information obtained can be measured and the results analysed, and how well documentation of their findings will stand up to scrutiny from HMRC.

Penalties

In general, a person is liable to a fixed penalty of GBP500 and a daily penalty of GBP40 for each day on which the person continues to fail to comply with any of the “specified requirements”. These requirements include payments of tax and the requirement to keep and preserve records.

There are separate penalties specified for failure to notify liability to be registered, file returns, make quarterly payment and depending on various factors eg delay, whether the business deliberately concealed and withheld information etc. the penalties can range up to 100%. Interest on late payments may also apply. There are also fines, prosecutions and criminal procedures set out in the legislation, for more serious offences which involve intention to avoid paying the tax, knowledge, or recklessness.

This publication is intended as a general overview and discussion of the subjects at the time of original publication and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation.

If you would like to find out more about PPT, including what you can be doing to ensure compliance with the due diligence requirements, please contact Pranay Sofet, Richard Woolich, Jason Collins or Lauren Redhead.