Lessons for landfill operators – Landfill Tax claims for generating landfill gas

Earlier this month, Britain reached a landmark in the transition away from fossil fuel reliance. For the first time since 1882, we passed a whole week without using coal to generate electricity.

Aside from the important differences in pollution and carbon emissions, renewable energies differ from fossil fuels in another interesting way. Whereas fossils are widely considered as ‘resources’ in the traditional sense, the resources used to generate renewable energy often inhabit a more grey area.

Take waste, for example. Much has been written about the classification of waste, and the exact moment when it transforms to become a product. For those operating landfill gas equipment, which generates renewable energy from household and commercial waste, the distinction can be confusing and frustrating. If waste is being used as a resource, which contributes to the renewable energy mix, then surely it should be valued in its own right, and exempt from Landfill Tax?

For those who have asked this question, the answer can be found in the landmark case involving Patersons of Greenoakhill, which challenged HMRC by seeking to reclaim £17.6 million (later revised to £3.5 million) of Landfill Tax, which it had previously paid in relation to mixed waste that was used to generate renewable energy. 

The landfill operator eventually lost its case in The Court of Appeal, no doubt disappointing other operators which generate electricity from landfill gas. For those still unclear as to the reasons behind the outcome, let’s look at this case closely.

Intention to re-use landfill waste?

Under sections 40(2)(a) and 64(1) of the Finance Act 1996, Landfill Tax should only be payable by a landfill operator when it makes a disposal of material as waste, with the intention of discarding the material.  

Patersons believed that it should not be required to pay Landfill Tax on any domestic, commercial and industrial waste deposited that was expected to produce landfill gas because, it argued, it had no intention of discarding the waste but, instead, planned to use it for the production and supply of renewable electricity for the National Grid.

Patersons also highlighted two earlier cases, involving Parkwood Landfill Ltd and Waste Recycling Group Ltd, where the courts confirmed that landfill operators are not required to pay Landfill Tax in circumstances where landfill operators reuse material received at their landfill site in applications such as roadmaking, landscaping or as daily covering. 

We understand that Patersons’ landfill site produces up to 52,280 megawatt hours of renewable electricity each year. In other words, enough electricity to power 13,000 UK homes per year (or 109,377 UK homes from January 2008 to December 2018), according to the industry regulator, Ofgem’s records.

Can renewable energy from landfill gas qualify as recycling of waste material?

Patersons reasoned that it had no intention to ‘cast aside’ or ‘abandon’ its waste. Rather, it says, it had deposited waste material into the landfill void to provide future benefits (i.e. methane for electricity) in the same way that a seed is put into the ground to derive a later harvest when it grows. Therefore, all of its gas-producing waste was being recycled to produce renewable energy and, therefore, should not be subject to Landfill Tax.

However, the court took the view that Patersons “were not planting the seed but dumping it”. That is, it believed that Patersons was intending to get rid of waste material and that this material was wholly separate from the landfill gas (which did not exist when the waste was deposited) that was later produced and recycled.

As a result, the court held that Patersons should pay Landfill Tax in respect of all waste material, even though some of the waste produced landfill gas and renewable energy.

Why did the court make its decision?

We have reviewed the judgement handed down by the court, and noted that the decision was significantly influenced by the following assertions: 

1. The process of decomposition does not reduce the volume of landfill waste.

2. The amount of biodegradable material does not decrease when Patersons uses the methane to generate electricity.

3. It is not possible to identify the value of landfill tax due on the tonnage of the deposited waste from which methane was produced.

Essentially, the court believed that the production of renewable energy had no effect on the quantity of biodegradable material that was deposited and / or used to produce landfill gas – Patersons simply used the landfill gas alone, and that it utilised none of the biodegradable “material” in order to produce renewable energy. As a result, there could be no viable claim for a reimbursement of Landfill Tax.  

At first glance this might seem counter-intuitive, especially if we remember Albert Einstein’s famous formula (i.e. E = mc2), which says that anything having mass (such as landfill waste) has an equivalent amount of energy, and vice versa. It seems reasonable to expect the biodegradable material (mass) to be utilised if it was used to produce renewable energy. 

Was biodegradable material recycled?

If we know the amount of renewable energy that was produced by Patersons’ biodegradable waste, then we should be able to accurately calculate how many tonnes of landfill waste was actually used (m = E ÷ c2), and how much should, theoretically, be exempt from Landfill Tax.      

We followed Einstein’s formula and found that Patersons’ landfill site produced 453,915 megawatt hours of renewable energy from January 2008 to December 2018. This results in a total saving of just 18.2 grams of waste material that genuinely could be said to have been diverted away from the landfill site during this time.

How much Landfill Tax could have been saved?

Unfortunately, due to the very small amount of biodegradable waste needed to produce vast amounts of renewable energy, this results in a total saving of less than 1p in Landfill Tax over an 11-year period (based on the actual mass of waste saved of 18.2 grams multiplied by the average landfill tax rate of £66.73 per tonne from 2008 to 2018).

This confirms that even if the court had granted Patersons’ retrospective tax claim, the amount of Landfill Tax saved in respect of waste actually recycled after a known amount of renewable energy was produced, would still be less than a penny. 

Although it appears that Patersons may have been technically correct in claiming that some of the biodegradable waste deposited was actually used or recycled, it was perhaps more than a little over-ambitious. To justify a Landfill Tax rebate of £3.5 million would, in reality, have required Patersons to recycle a staggering 136,000 tonnes of biodegradable material. 

Other lessons for landfill operators

Another key point that arose from the Patersons case is that, under the terms of their landfill permit and under Article 8 of the Landfill Directive, landfill operators now have a legal duty to generate renewable energy from their waste (rather than flaring methane gas), where possible.

Although Patersons had invested in eight Jenbacher engines (at the time, the most reliable and expensive model on the market), and employed a full-time site engineer to manage landfill gas extraction, many operators will be more inclined to outsource if they do not possess the necessary in-house resources to do so. This can work efficiently, as long as operators ensure that contracts for royalty payments are calculated accurately, which is something we can help with.

However they choose to go forward, landfill operators should be fully aware of their obligations in relation to producing renewable energy. As the market matures, many are now earning more from gas generation than from gate fees, which helps to provide some reassurance, despite the unfavourable outcome of this long-awaited case.