[2011] UKFTT 206 (TC)

TC01071

Appeal number:  TC/2010/05207

Aggregates levy; Finance Acts 2001; exempt process (s.18 FA 2001 as amended); meanings of “rock” and “stone”; what constitutes a “flat surface”; exempt process; stone blocks used held not liable to the levy.

FIRST-TIER TRIBUNAL

TAX (AGGREGATES LEVY)

	JONES BROTHERS RUTHIN (CIVIL ENGINEERING) CO.LIMITED 	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL: 	JUDGE: CHRISTOPHER HACKING
		MEMBER: SUSAN STOTT

Sitting in public in Manchester on 4 February 2011

Mr Graham Gibson, Materials Manager of and for the Appellant

Mr Nigel Bird of counsel instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2011

DECISION
Introduction

1.	This was an appeal against a decision originally made by the Respondents on 20 April 2010 and confirmed on review on 01 June 2010. The decision was that granite blocks procured from a quarry in St Malo, France and commercially exploited by the Appellant were considered to be aggregate and as such aggregates levy was chargeable.
2.	Aggregates levy was introduced by ss 16 to 49 of the Finance Act 2001(“the Act”) and came into effect on 01 April 2002. The tax is charged on aggregate subjected to commercial exploitation. “Aggregate” is rock, gravel or sand and “commercial exploitation” is by ss 17, 19 of the Act, broadly, removal from a relevant site or use in the construction industry. There are various exemptions of source sites, materials and processes. The aim of the levy is to encourage the recycling of aggregate (in particular material obtained as a result of the demolition of buildings) and to discourage the quarrying of virgin material.
The factual background to this appeal
3.	On behalf of the Appellant the tribunal heard evidence from Mr Graham Gibson who gave an account of his company’s dealings with the material concerned. Mr Gibson was the company’s materials manager and had considerable experience in the civil engineering industry. It should be said at the outset that this was a case in which the facts are not in issue between the parties.
4.	The Appellant company was engaged in the construction of sea defences at Tywyn on the west coast of Wales, a coastline at risk of erosion. The works involved sourcing suitably large rocks which when placed as required have the result of reducing the power of the waves at the shoreline and thereby limiting erosion. The granite rocks required for this purpose weigh between 3 and 15 tons. 
5.	We heard from Mr Gibson that ideally the rocks used should be irregular in shape and of a substantial mass of over at least 3 tons and preferably more. It was the Appellant’s hope that it might source the material it required from a local quarry at Penmaenmawr with which it had had previous experience. The tribunal was shown a photograph of the type of rocks typically supplied by this quarry. The rocks can properly be characterised as being of random shape and irregular size. None appeared to exhibit flat surfaces. Correspondingly the rock faces of the quarry appear to reflect the irregular nature of the rocks obtained from it. In particular there did not appear to be a single or uniform face from which the rock was obtained. This is not perhaps surprising as we were told that high explosives are generally used in most UK quarries for the fracture and decomposition of rock mass leading inevitably to a lack of uniformity. Mr Gibson had explained this fact to the Respondents in an e-mail dated 14 April 2010.
6.	On this occasion the Appellants were unable to secure rocks of the size and mass required. As indicated above they needed rocks of weights between 3 and 6 tonnes, 6 and 10 tonnes and 10 to 15 tonnes. The quarry at Penmaenmawr could not produce suitable rocks above 3 tonnes. The Appellants decided to source their requirements from a French quarry company, Sillanpaa of St Malo, on the north French coast. This quarry, unlike the Penmaenmawr quarry, was worked for the production of architectural and monumental stone products. In his e-mail to the Respondents (above) Mr Gibson explained the process of stone production at Sillanpaa as follows: 
“Stone is extracted by sawing and splitting in order to maximise the size of the rock and to maintain it in its most competent form.” 
Again the tribunal had the opportunity of studying photographs which depicted a general view of the St Malo quarry as well as of stone in various stages of its production including blocks of granite of regular shape ready for dispatch to customers.
7.	The St Malo quarry, unlike that at Penmaenmawr, exhibited generally uniform vertically disposed rock faces arranged at 3 or 4 separate levels with a horizontally disposed bench between each level enabling the rock to be cleaved from the faces using a splitting process known as “plug and feather”. This process involves drilling into the horizontal rock face both vertically and longitudinally following which the rock can be cleaved from the face mechanically or by introducing into the drilled holes a liquid which will expand and cause the rock to separate from the face. 
8.	One of the results of producing stone blocks in this way is that the faces which have been drilled as part of the process of severance from the main rock face exhibit uniform corrugations along the drill lines. These were quite evident from the photographs seen by the tribunal.
9.	 Following the removal of the blocks in the above manner from the rock face they are, states Mr Gibson in his e-mail:
“further sawn and split …………to produce regular blocks for sawing. Image St Malo 10 shows this product on stock in the quarry prior to shipping to the Tywyn contract”
 The blocks are subsequently delivered to the site by ship where they are deposited directly onto the beach at high water being recovered and placed as the tide recedes.
10.   The blocks ready for dispatch to Twywn are of a regular box or cube shape with what appear to be 6 flat surfaces.
11. It is against this factual background that the tribunal is required to determine whether, as contended by the Respondents, the use in the UK of the granite blocks attracts the aggregates levy or whether, as the Appellant argues, the blocks are exempt from the levy within the terms of the legislation.
The legislation
12.   The scheme of the legislation is helpfully outlined in the Respondents Statement of Case. 
S 16 (1) of the Act provides that a tax to be known as aggregates levy shall be charged….on aggregate subject to commercial exploitation. 
S.16 (2) provides that the charge to levy arises on the commercial exploitation of taxable aggregate while s 16 (3) provides that the person charged with the levy is the person responsible for the commercial exploitation.
S 17 of the Act defines aggregate and taxable aggregate while s 18 defines Exempt Processes. S 18 (2)(a) includes in the definition of Exempt Process the following :
“the cutting of the rock to produce stone with one or more flat surfaces”
It is perhaps convenient at this point to state that the definition of Exempt Processes was one which in the original text of the provision referred to the cutting of the rock to produce dimension stone rather than as now simply to “stone with one or more flat surfaces”. The expression “dimension stone” was not itself defined as it was presumably considered to be a known term of art within the quarrying industry. Asked about this change by the tribunal Mr Bird suggested that it was probably considered clearer to use the reference to flat surface(s) rather then to place reliance on a term of art which might be capable of differing interpretations.
13.   Whether or not that is so, the Respondents published a definition referring to “dimension stone” for the guidance of the industry. This appears in the Respondents’ Public Notice AGL1: which at Paragraph 2 defines Exempt Processes as;
(1) Creating dimension stone, building stone, or any other type of flat stone, by intentionally cutting or otherwise shaping stone to produce one or more flat surfaces. This does not include riving or other similar methods of extraction where rock is merely extracted from the ground along a bedding plane or other line of natural weakness. It does however include hand riving of stone where this is a separate cutting process which takes place after extraction…
It is to be noted here that the definition clearly distinguishes between a process which involves a method of extraction from the rock and a separate process involving cutting or hand riving which takes place after the extraction .
The Respondents’ case
14.  It is the Respondents case that the blocks supplied to the Appellant have not been the subject of an Exempt Process as defined. In particular the Respondents have not accepted and do not accept the Appellant’s contentions that any flat surfaces on the stones are produced intentionally by the deliberate splitting of the rocks.
15.  The Respondents do not consider that the “plug and feather” method of splitting the blocks as described above falls within the process detailed at s 18 (2) of the Act. They consider that any flat surface would be created incidentally (in the course of creating blocks of manageable size) rather than intentionally. This contention they say is borne out by the intended use of the blocks by the Appellant for sea defences, an appropriate use for aggregate but one for which regular blocks with flat faces would not seem to be appropriate.
16.   Whilst the Respondents did not originally raise this argument in their correspondence with the Appellant, it is not conceded that the blocks supplied to the Appellant have flat surfaces in that from the photographs in evidence they would appear to have corrugated surfaces rather than flat surfaces.
17.   Mr Bird proposes in his skeleton argument that it is clear that the statute envisages:
•	A change in the nature of the thing to which the process is applied (the aggregate) from “rock” to “stone”;
•	The intentional presence of one or more flat surfaces on the finished product (the “stone”)
The mere presence of a flat surface after cutting is not, he suggests, enough. In support of this contention Mr Bird points to the following:
•	A natural consequence (or incidental result) of certain types of “cutting” (for example sawing) is the production of a flat surface. If it was intended that the mere production of a flat surface would be sufficient to satisfy the definition of “exempt process” it need only have provided that the exemption would arise if “the cutting of any rock [produced] stone with one or more surfaces.
•	It is clear says Mr Bird that the words used by Parliament are much narrower
•	To determine if the “cutting” is to produce partially flat stone, the tribunal must look at why the cutting takes place. There are, he says, 2 choices:
                 (a)   in order to produce stone with one or more flat surfaces; or
                 (b)   for some other purpose
No evidence was before the tribunal as to the dominant motive of those directly involved in the quarrying process and the creation of any flat surfaces exhibited by the blocks as delivered to the Appellant but as conceded by Mr Bird this was not a case where difficult questions of motive arise. The question for the tribunal was essentially one of fact.
The Appellant’s case
18.   The Appellant’s case can be quite simply stated. The Appellant accepts without qualification that rock quarried in the manner employed at the Penmaenmawr quarry produces aggregate which when commercially exploited is taxable as such. The product produced at the St Malo quarry is, they say, quite different. The difference is that, quite apart from the manner of severance of the stone from the rock face as described above the stone is then subjected to a further process of cutting or splitting to create stone of desired dimensions and it is this further process involving the creation of one or more flat surfaces which removes the stone from the scope of the levy. The Appellant has agreed that the flat surfaces produced are the result of deliberate splitting of the rock along lines of parallel and perpendicular drilling. At the stage at which the parties were in correspondence about the matter a misunderstanding arose in that the Appellant appears at one stage to have thought that the Revenue was arguing that the flat surfaces were created by “accident” whereas it is now accepted that what the Revenue contend is that the creation of such surfaces is a necessary incident of the manner of the rocks splitting rather than a deliberate creation of flat surfaces for some other purpose. 
The tribunal’s consideration of the arguments
19.   The language of the legislation is quite straight forward. The words used are (now at least) simple words which in the absence of any definitions within the Act must be given their ordinary meanings.
20.   The first two words with which the tribunal has had to come to terms are those of “rock” and “stone”. These are defined in the Shorter Oxford English Dictionary (Volume 2) thus: (primary meanings in each case)
Rock: “A large rugged mass of stone forming a cliff, crag or natural prominence on land or in the sea”
Stone:  “A piece of rock or hard mineral substance (other than metal) of a small or moderate size”
It would seem therefore that the term “rock” is more apt to describe the face from which stone is obtained whilst “stone” represents the product of the quarrying activity. It is noted however that these terms are not always used entirely consistently with these definitions. For example the language of s 18 (2)(a) in dealing with an exempt process speaks of one which involves the “cutting of any rock to produce stone with one or more flat surfaces…..”(emphasis added) Consistent with this the exempt process would require that the flat surfaces are deliberately produced as part of the process of severance or extraction of the stone from the rock; otherwise the section would read “cutting of any stone………”.The result if strictly construed would be that one would be required to ignore any process which involved the subsequent cutting of stone so as to produce flat surfaces, a strange and illogical result which seems contrary to the purpose and intention of the legislation. The terms rock and stone are not defined in the Act and we believe therefore that the proper approach to this is to accord to the legislation a purposive construction looking to the true intent of the provision. That intent would appear clearly to be to exclude from the charge to the levy stone which had, after severance from the rock face, been subjected to further processing involving the deliberate creation of one or more flat surfaces. 
21.   Whilst dealing with dictionary definitions it is also helpful to look at the definition of the word “flat” Again by reference to the same source, the primary and literal meaning for this is given thus:
Flat:  “Horizontally level without inclinations. Of a seam: not tilted.” 
This definition too is not wholly without its problems. Does for example a flat surface cease to be such when disposed vertically rather than horizontally or if it is tilted at an angle? We think not. The word is one of common usage however and the tribunal is content that it refers to a level surface across the principal dimensions of a given plane. The word “flat” was not at issue in the appeal save only as hereafter appears so that the ordinarily understood meaning of that word is quite adequate for the purposes of this decision
22.  These definitions support the view expressed by Mr Bird in his skeleton argument that a change in the nature of the thing to which the process is applied is envisaged by the statute. Stone only becomes such when it has been cleaved from the rock. For the reason stated at paragraph 20 above we think that there is a problem with this strict approach and that a purposive construction of the legislation is required. We agree with him however that what is required for there to be established an exempt process is “the intentional presence of one or more flat surfaces on the finished product (the “stone”)”
23.   In the view of the tribunal there are two quite clear and distinct operations involved in the production of the stone blocks delivered to the Appellant from the St Malo quarry. The first step is the severance from the rock face of large stone blocks of a generally square cross section but of dimensions which are usually larger than required by the quarry’s customers. Examples of these blocks could clearly be seen in the photographs produced to the tribunal. This oversized stone then requires further working to produces stone blocks of the type delivered to the quarry’s customers including in this case the Appellant. This process according to Mr Gibson’s evidence, which the tribunal accepts, involves further drilling both vertically and horizontally as may be required to produce a regular box or cube shape in which the edges are disposed at right angles to one another producing flat surfaces. This process may, said Mr Gibson, involve the progressive use of drills of reducing size so as to end up with a product which meets the needs of the customer. It is this process which the Appellant contends constitutes an “exempt process” falling within the terms of the legislation. The process of re-sizing the blocks is a deliberate one necessarily involving the production of flat surfaces and not as counsel for the Respondents has suggested one in which the flat surfaces are merely an incident of the process 
24.  The tribunal agrees with Mr Gibson’s contentions in this respect for a number of reasons.
25.   Firstly it is quite clear to the tribunal that the further process described above constitutes a process which goes beyond merely reducing the size of large pieces of stone already separated from the rock face. Mr Gibson in his evidence told the tribunal that the final regular block or box shapes produced were needed by the usual customers of the St Malo quarry as they were, in the main, architectural or monumental masons and a cube was the most efficient shape in terms of the optimal utilisation of the stone. Other shapes would necessarily involve an element of waste (such waste would it might be added constitute “aggregate”). Although no testimony was adduced to this effect we believe it to be self evident that a box shape or block must be more convenient in terms of storage and handling also and this is no doubt a further reason for producing blocks to this shape. Clearly too the process will involve sizing the blocks. We were told that blocks of different weights or mass were required by the Appellant and that is no doubt why Mr Gibson referred in his evidence to the progressive drilling of the blocks with commensurately smaller drill sizes so as to produce blocks of the desired dimensions.
26.   To argue as do the Respondents that these further steps conducted after the severance of blocks from the rock face and which deliberately involve the creation of flat surfaces do not amount to an exempt process but must be considered simply as an incident of the cutting of the rock seems to the tribunal to be unrealistic. The purpose of the drilling of the large stone blocks after they have been obtained from the rock face is part of a deliberate process designed to produce stone of specified dimensions suitable for the customers needs. If the purpose was simply to split the rock randomly and in the course of that operation flat surfaces were revealed then we think it is reasonably arguable that such stone could be said to be aggregate as counsel for the Respondents submits. We are satisfied however that this is not the case. The large stone blocks which were themselves cleaved quite carefully from the rock faces at St Malo are subjected to further processing to produce a final product which in our judgment exhibits flat faces and is quite different from what is understood to be aggregate..
27.   Mr Bird does not concede that the faces are flat. As indicated above this was not an issue originally raised by the Revenue. It is right though that having been raised, this question should be dealt with now. It is true that the faces exhibit corrugations across what would otherwise appear as a smooth surface. Smoothness however is not the issue. The question is whether the surfaces are “flat”. In this we are assisted by the definition appearing above (despite its limitations) and by our own understanding of the ordinary meaning of the word “flat”. The surfaces (or at least 2 at any given time) are flat in the sense that they are “horizontally level without inclinations” They are not tilted (at least not if placed on a flat surface). The tribunal suggests that a flat roof constructed from corrugated iron is no less a flat roof by reason of its corrugations. It is a flat roof in contradistinction to a tilted or pitched roof. If any question of flatness is to be considered qualitatively according to the property of smoothness then a question of degree and relativity arises i.e. flatness compared to what? Whilst we do not accept that this is the proper way to approach the matter the answer would in our view be clear, namely that the blocks delivered to the Appellant are flat when compared with those which are produced at the Penmaenmawr quarry as can clearly be seen from the photographs viewed at the hearing of this appeal.
28.   It is in our judgment clear that what the legislation sought to avoid in granting exemption from the levy was a situation in which the act of winning stone from a rock face resulted in fracturing along a stress line such that as an incident of the operation stone with one or more flat faces might be produced. Such stone would, we agree, still be considered as aggregate. It is in our view not without significance that (as noted above) s 18 (2)(a) of the Act in defining an “exempt process”  speaks of “the cutting of any rock to produce stone…..”(emphasis added). This is wholly consistent with the concerns expressed above that stone which on severance from the rock face incidentally exhibits a flat face might be considered as exempt when quite properly it remains aggregate and liable as such to the levy. What is required for the exemption to apply is a quite deliberate process of cutting  which has as an object the creation of one or more flat surfaces. That is what we find as a fact happened at St Malo.
29.   We should mention one other aspect of this appeal. This concerns the fact that the intended use by the Appellant of the stone produced at St Malo was one which in the normal course was more suitably met by aggregate. Mr Bird says that this lends further support for his interpretation of the legislation. We do not agree. The question of motive as Mr Bird has agreed does not arise in this case nor, we would add, would it arise in any case where there is clear evidence of a deliberate cutting of rock to produce stone with one or more flat surfaces. We agree that the use of the stone in the manner deployed in this case is one which from an environmental aspect is unsatisfactory but that is a matter outside the scope of the legislation as drafted. Mr Gibson admitted quite candidly that he would have been happy to use aggregate and to have paid duty on that had such been available to him from Penmaenmawr. Because these facts are unusual it does not seem to the tribunal that this decision is likely to be one which will be of any great significance to the quarrying industry. Quarries such as those at Penmaenmawr and St Malo are quite different in their product output. One produces aggregate liable to the levy. The other produces what was formerly described as dimension stone with flat surfaces produced quite deliberately and which is not subject to the levy when commercially exploited.
30.   For the above reasons we allow this appeal.  

CHRISTOPHER HACKING

TRIBUNAL JUDGE
RELEASE DATE: 24 March 2011