Tax dispute involving Vaughan Gething donor costs Cardiff council £16 million

Martin Shipton

The businessman whose huge donations prompted the scandal that brought down former First Minister Vaughan Gething is now at the heart of a landfill tax dispute that will cost Cardiff council more than £16m.

Mr Gething’s acceptance of £200,000 for his Welsh Labour leadership campaign from a company owned by David Neal, who had received two suspended prison sentences for dumping toxic sludge in the Gwent Levels protected landscape, eventually proved his undoing.

Now Cardiff council has announced it has reached an in-principle agreement with HMRC to settle a tax dispute related to soil and material brought to the former Lamby Way landfill between 2015 and 2017 to contour and cap the site.

The soil came from Neal Soils, a company founded and owned by Mr Neal.

Landfill tax rules

The dispute involved disagreements over the correct application of 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.

The full disputed amount was initially £35.3m in unpaid landfill tax. Penalties brought the total liability to nearly £45m – 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 £12.3m bill in unpaid landfill tax and approximately £3.9m in interest. This means the council’s liability will be reduced by at least £28m in unpaid tax and penalties, and considerably more in any interest that would have been due.

Settlement

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.

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.

According to the council, there is no suggestion of any impropriety or illegality – 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.

Pragmatic

Cllr Chris Weaver, the authority’s 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 emphasised 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.”

Engage

The council says it took several significant actions to engage with HMRC and mitigate the landfill tax assessments, including:

1. Appointment of Advisers: The council appointed PwC as advisers 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 inquiry 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.

It is understood that all the settlement relates to soil deposited by Neal Soils. It is also understood that the council is considering taking debt recovery action against the company.

Incompetence

Cllr Rodney Berman, the council’s Lib Dem opposition leader, said: “This sorry saga represents a tale of sheer incompetence and secrecy from Cardiff’s Labour-run council. Whilst we have known for some years that the authority was locked in a protracted dispute with HMRC about an alleged underpayment of landfill tax, we weren’t previously made aware this related to materials placed on the tip by the council itself to cap and restore it at the end of its life. Nor were we told where the council had obtained those materials, or just how high in value the disputed underpayment was.

“I am simply flabbergasted to hear that the council clearly wasn’t on top of knowing what it was tipping and what rate of landfill tax it should therefore have been paying in relation to the materials in question.

““Paying out £16.2m now that wasn’t previously budgeted for will be a massive hit to the council’s finances which it can ill afford – especially at a time when the authority hasn’t been able to give over a third of the city’s schools enough cash to cover running costs, is facing another massive budget deficit in the coming year, and has recently agreed to shell out millions towards the delivery of a new indoor arena.

“The council is having to get permission from the Welsh Government to borrow much of what it needs to pay, meaning it will potentially have to pay out £2m a year in debt repayments over the next 10 years to pay this borrowing back. That will undoubtedly mean more cuts in key services for Cardiff’s residents.”

Cllr Berman added: “As has been reported in the media, David Neal’s group of companies has been under investigation for allegedly ‘mischaracterising’ categories of waste in order to minimise the payment of landfill tax – the same thing that Cardiff council is now accepting it has done. Their role in what has happened at Lamby Way clearly needs to be explained.

“We must now have a full and open inquiry into what went wrong and why the Labour-run council has blundered in such a spectacular way.”