Government fights waste plastics with new tax for non-recycled packaging

As of 1 April 2022, an organisation must register online for plastic packaging tax if it has manufactured or imported 10 or more tonnes of plastic packaging within the last 12 months (in this, the first year, since 1 April 2022), or if its plans to surpass this threshold in the next 30 days. The tax is charged at a rate of £200 per metric tonne of chargeable plastic packaging components, being those which contain less than 30% recycled plastic content by weight of the finished packaging component.

A plastic packaging component is deemed "finished" when it has had its last "substantial modification". Determining the point at which the packaging is finished is critical in knowing where liability for the tax falls, but may not always be straightforward to determine. The Government has issued guidance on this specific aspect of the tax, which includes the following:

• An imported packaged product (ie. a package already filled with goods) is a finished packaging component and the importer of that packaged product must account for the tax.
  
  
• The entity carrying out the last substantial modification will be the liable entity; this occurs where a manufacturing process changes the packaging component's shape, structure, thickness or weight, but not all manufacturing processes are substantial modifications.
  
  
• While extrusion, forming, layering/laminating, moulding and printing are all "substantial modifications", blowing, cutting, labelling and sealing are not.

The guidance states that entities operating on the basis of Incoterms should address liability for the tax explicitly.

Whilst it is the entity that imports into the UK or manufactures the plastic packaging components that has the primary liability to pay plastic packaging tax, in some circumstances other entities can be either jointly and severally liable or secondarily liable for the payment of plastic packaging tax.  Accordingly, entities involved in the production or importation of plastic packaging tax should carry out appropriate due diligence on their contractual counterparties and the products they are purchasing to ensure that plastic packaging tax has been correctly paid. Unpaid tax attracts financial penalties and is in some instances a criminal offence.

Manufacturers and importers should ensure that they keep comprehensive records in support of future tax returns, which should cover, for example, a breakdown of the weight of finished plastic packaging components they imported, any amounts on which tax was deferred, or any information in support of claims that certain volumes were exempt. They may also need to present this to other supply chain actors carrying out due diligence to avoid potential liability for themselves for unpaid taxes.

It is worth noting that entities in scope include non-UK entities who import relevant packaging. The importer is generally deemed to be the consignee unless it can be shown that they are acting on behalf of someone else controlling the import.

Corporate groups can register together allowing for one member of the group to complete returns and make payments on behalf of all group entities.

The tax covers plastic used in packaging in the supply chain and single use plastics for consumers, which includes both domestic and commercial consumers, with less than 30% recycled content. If the packaging is made up of several components then each component will need to be accounted, for example bottles, caps and labels.

Packaging is covered, whether supply chain or single-use consumer packaging, where it is "suitable for use", whether alone or in combination with other products, for the containment, protection, handling, presentation or delivery of goods. The phrasing of this part of the legislation suggests that it will be for a manufacturer/importer using plastic for an out-of-scope purpose to prove that it is not subject to the tax.

Plastic is a polymer material to which additives or substances (for example dyes) may have been added, including biodegradable, compostable and oxo-degradable polymers. Cellulose-based polymers which have not been chemically modified will not be deemed plastics.

As noted above, only "finished" plastic packaging components are subject to the tax.

If packaging is made from multiple materials but contains more plastic by weight, the entire weight of the packaging component will be taxable. According to Government guidance, this means that where a packaging component contains 4g of plastic, 3g of aluminium and 3g of cardboard, the entire 10g component will be counted for the purposes of the 10 tonne annual threshold, and for payment of the tax where applicable. The burden of proving that packaging is not a "plastic packaging component" falls on the manufacturer/importer.

Similarly, even though plastic packaging containing 30% or more recycled material is not subject to the tax, volumes of recycled-content packaging do count towards the 10 tonne annual threshold. This means that a manufacturer or importer of mostly recycled packaging, with small amounts of non-recyclable/lower recycled content packaging, will still have to pay the tax on the latter types of packaging.

Plastic is deemed recycled – for the purposes of assessing the 30% recycled content threshold - when it has been reprocessed from "recovered material" using a chemical or manufacturing process so it can be used for its original purpose or another purpose. It does not, however, include organic recycling, i.e. aerobic/industrial composting or anaerobic/biogasification treatment.

Recovered material is pre-consumer plastic or post-consumer plastic that both:

• is no longer suitable to be used in the process from which it was generated and would otherwise have been used for energy recovery or disposed of as waste, and
  
  
• has been collected and recovered for use as a material input for a recycling or manufacturing process, instead of new primary material.

In summary, the tax will not apply to plastic packaging which:

• Has 30% or more recycled plastic content;
  
  
• Is made of a number of a materials where plastic is not proportionately the heaviest when measured by weight;
  
  
• Is intended to be used as immediate packaging of licensed human medicines;
  
  
• Is used as transport packaging to import products into the UK; or
  
  
• Is exported, filled or unfilled, unless it is in use as transport packaging to export products out of the UK.

Furthermore, packaging is excluded from the tax where it is used in the long term storage of goods, such as a first aid box, plastic that is an integral part of the goods like an inhaler, or packaging designed to be reused for the presentation of goods such a sales display shelf. The Government has published illustrative lists of covered and excluded types of packaging. Certain examples show just how challenging the application will be: carrier bags are subject to the tax, but "bags-for-life" are not; a lipstick mechanism and case is not subject to the tax but the cap is, whereas a mascara bottle is subject to the tax, and the brush, wand and cap are not. Inevitably there will be borderline cases where businesses will need to carefully consider whether their packaging is within the scope of the tax and support any out-of-scope decision with a reasoned opinion.

The Government has played down any perceived short term impact of the tax on domestic consumers, which it claims will only occur if businesses pass on the charge, itself a relatively modest increase on a per unit basis, though the food industry claims that the change will fuel inflationary rises. In commercial relationships, businesses can expect their costs to increase as manufacturers subject to the tax seek to pass it on, particularly in times of rising costs across the supply chain.

Long term, Defra points to the fact that businesses will be encouraged to use recycled plastics instead of new plastics – suggesting therefore that the tax represents an avoidable cost. Defra projects that use of recycled plastic could increase by 40%, equivalent to carbon savings of nearly 200,000 tonnes. With that said, the Government still expects significant revenues from the tax in the next few years, with a modest decline from £235m to £210m annual revenues between 2022 and 2026.

The UK is not the first and will undoubtedly not be the last jurisdiction to impose a tax on plastics to deter the use of virgin materials and promote a circular economy. As taxes are almost exclusively a national matter, even for EU member states, keeping on top of the intricacies of each is a challenging but necessary task for businesses.