It is now one year since the imposition of plastic packaging tax (PPT) in the UK, and three years since the government’s consultation on the policy design for PPT. Much has happened for businesses and advisers dealing with the tax since April 2022. Before we look at the practical challenges, let’s remind ourselves first of the fundamental aims of the tax.

Aims of the tax

First and foremost, PPT is an environmental tax intended to provide a financial incentive for businesses to use recycled plastic in the manufacture of plastic packaging. The origins of PPT stem from the outcome of a call for evidence by the government on using the tax system (or charges) to tackle single-use plastic waste. The problem is that plastic packaging is typically only used for a short period of time before disposal, but accounts for 44% of plastic used in the UK.

To counter this, the government introduced PPT on plastic packaging manufactured in or imported into the UK that has less than 30% recycled content. The tax was initially set at a rate of £200 per tonne, to provide a clear economic incentive for businesses to use recycled material rather than ‘virgin’ plastic in the production of plastic packaging.

The government believes that this will create greater demand for recycled plastic and, in turn, stimulate increased levels of collection and recycling of plastic waste.

Current issues

A year on from its imposition, businesses are still getting to grips with PPT. One of the main issues is the requirement it places on businesses to extract weight-based data from their systems. One might think that data extraction should be straightforward; however, this is not financial data. The tax requires a calculation of charge based on the weight of plastic packaging manufactured or imported. 

This requirement can expose a disconnect between a business’s operational teams – such as procurement and sales – and their finance team, which is used to managing tax data. It is fair to say that the levels of engagement of the different stakeholders vary.

HMRC’s guidance on the type of data to be measured is also confusing businesses. For example, questions that are being asked by businesses unsure of where the boundaries lie include:

• Should plastic packaging that contains 30% or more recycled plastic content be included in the calculations for registration (10 tonnes in a 12-month period)?
  Yes, this data also needs to be collated as plastic packaging containing recycled content counts towards the registration limit, even though it does not attract a tax liability.
• What other data needs to be included towards the 10-tonne limit? Again, the short answer is most packaging data. This includes packaging used for human medicines and plastic packaging components permanently recorded as set aside for non-packaging use (eg, plastic film for whiteboards) – both of which are exempt from PPT. However, data for products that specifically sit outside of the charge to tax itself must be excluded, such as packaging that is:
• for long-term storage (eg, toolboxes);
• an integral part of the goods (eg, water filters); or
• used for presentation (eg, display shelves).

Transport packaging on imported goods and packaging used for stores on international journeys, which are exempt from the tax, should also be excluded when considering the 10-tonne limit.

HMRC regularly updates its lists of examples of packaging that it considers are in and out of scope of PPT.

A business that has extracted data cannot always extract ‘clean’ data. The tax requires that data is collected at product level in order to calculate a charge to tax. This produces challenges for larger businesses with big product portfolios and where mixed materials (cardboard/plastic, metal/plastic and glass/plastic) can often be combined in the packaging.

With the tax being calculated at product level, the weight-based data should be applied to all components within a product. For example, for a plastic bottle with a cap and label, the weight of all components should be known separately.

In our experience, collating the detailed level of data required for PPT across large product portfolios has led to businesses having to invest additional man hours in establishing weight-based data within operational teams. 

Practical requirements

Step forward the tax ‘expert’ or ‘adviser’. Sometimes, we are needed to be a voice of reason or rationalisation of HMRC guidance and, often, the person who has to remain focused on the outcome. So what should a prudent adviser be seeking to achieve? 

• First, establish whether a business has a requirement to register for PPT based on its presence inside or outside the UK. 
• Second, establish a date that the business becomes (or became) liable to be registered (depending on the test employed). 
• Finally, the value of the charge to tax based on what the data is illustrating. 

These are not easy areas to navigate, especially when the data is only partially complete or is estimated.

Requirement to register

As previously noted, the charge to tax arises on the weight of plastic packaging manufactured or imported into the UK by a business. The term ‘manufactured’ is relatively straightforward in that the business manufacturing normally has a presence in the UK by way of a factory. But what about overseas businesses that ship to the UK? What are the terms of transit? Who has responsibility for clearing the goods through customs entry into the UK? Is the shipper responsible for the goods clearance and transport? 

If the overseas business is responsible, (ie, if it is the importer) then there is a requirement to register if the 10-tonne limit is breached. If the overseas business does not have a UK presence (eg, a UK branch, or warehouse), then there is still a requirement to register if the registration limit is breached. 

Many businesses will recognise these circumstances and will have correctly interpreted the requirement to register, complete returns and pay the tax due. However, there will also be businesses unaware of the need to register based on their knowledge of their own business operations.

Documentation across the supply chain

As with all taxes, the PPT rules require documentation trails to be maintained. This places the onus on businesses and advisers to ensure that records are kept, and record checks are made covering (but not be limited to) registration, filing of quarterly returns and payment of PPT. 

Given that the 10-tonne threshold is cumulative, this effectively means that businesses have had to maintain audit trails since 1 April 2022 to establish when registration should have applied. However, some were not ready for this and had to carry out expensive catch-up exercises.

Similarly, data used in the assembly of the PPT returns has to be maintained as a prime record of evidence to support filings made. Building systems for this have proved challenging for large businesses with multiple packaging streams and sites. 

An example of this is the bespoke reports that a retail client needed to scope and write to capture data across multiple business channels flowing out of Europe and into the UK.

Due diligence checks required

The PPT rules also require that checks should be made to ensure that the business is not in a supply chain where the tax is not being accounted for. HMRC guidance advises that businesses should carry out due diligence checks if a supplier business manufactures plastic packaging components, imports plastic packaging components or buys plastic packaging components from another business.

Due diligence checks will help protect the business if any business that it trades with avoids or evades PPT, or does not comply with the requirements for PPT. To cover this aspect, HMRC built joint and several liability clauses into the tax that allow it to pursue the customer for deliberate non-payment of PPT by the supplier. It is important therefore that records are kept by customers of checks made on suppliers to mitigate this risk.

There is not, however, a prescriptive list of checks that must be carried out. As a result, businesses (purchasers as well as importers or manufacturers) have had to decide what checks are relevant, reasonable and proportionate to their business. They must also decide when and how often the checks should be completed and who within the business will be responsible for making them. For example, will this responsibility sit in finance, procurement or sales?

So, what might the expected checks look like? If a business is involved in the manufacture of plastic packaging components, a check could be obtaining written confirmation from your customer to prove any claim that the business is not liable. An example is if the customer performed the ‘last substantial modification’ to a component or perhaps getting confirmation of the origin of the recycled plastic that the reprocessor supplies. 

These suggested steps may sound simple to undertake. However, in practice they are proving difficult for businesses. For example, what is the incentive for a customer to confirm to their supplier that they have undertaken the last modification to a product? 

Recycled plastic content

Another area that is proving difficult relates to verifying that there is 30% or more recycled plastic content included within the manufacturing process. If the business acts as an importer, then checks can involve tracking back through the supplier’s manufacturing process and obtaining evidence to confirm that the component contains recycled content and the proportions included in the manufacturing process. 

This can involve a business getting copies of any certifications or audits that have been conducted on suppliers, or conducting physical inspections or audits on the packaging supply chain. There can be a lot of supplier data to validate to produce the audit trail that HMRC requires. 

These checks are adding to burdens already placed on businesses and finance teams, which are already stretched ensuring compliance with other deadlines and regulations for more established taxes.

The future of PPT

The next 12 months should see businesses settle into the routine of filing PPT returns and obtaining evidence needed to ensure obligations associated with the tax are met. 

Of course, one year in, HMRC enforcement activity on the tax may well ramp up with compliance reviews and the need to produce documentation becoming more pressing for businesses. Shrewd businesses will already be looking to develop end-to-end strategies to manage the risks associated with the tax – particularly when they engage with new suppliers or supply chains. 

One can easily imagine the rate of the tax and the recycled content percentage requirement increasing over years to come to ratchet up the ‘incentive’ to use recycled plastic. We have already seen a CPI-driven increase in the rate to £210.82 per tonne from 1 April 2023. This would increase the financial cost of the tax to those who have not changed their packaging and make gathering and processing accurate data on plastic use ever more important.

Chris Morgan, Director – VAT, BDO LLP