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Plastic Packaging Tax- is your supply chain ready?

The Plastic Packaging Tax (PPT) comes into effect from April 2022. PPT will be charged on plastic packaging which contains less than 30% recycled plastic material. The rate of tax is £200 per tonne of plastic packaging material.

The tax applies to plastic packaging components which includes a product designed to be suitable for use in the containment, protection, handling, delivery or presentation of goods at any stage in the supply chain. There are limited exceptions to this very wide definition, including packaging used in the immediate packaging of a medicinal product and transport packaging used on imported goods.

PPT is levied on producers of plastic packaging, and importers of packaging or of products which are packaged in plastic (food or drink products, for example). Since we wrote about the tax in May, Her Majesty’s Revenue and Customs (HMRC) has been contacting packaging producers and importers to alert them to the tax and that they may need to register for and pay PPT and update their systems to deal with the tax.

Although the focus is mainly on businesses which may need to pay the tax as producers or importers of packaging, other businesses in supply chains involving packaging need to consider whether the tax could also affect their costs and whether their supplier and customer contracts deal with PPT risks. Businesses may find that the cost of PPT can be passed onto them by their supplier but they may not be able to pass the cost to their customer.

An unusual feature of PPT is that HMRC has been given powers to impose “secondary liability” assessments on other parties in a supply chain in certain cases where a producer or importer has failed to pay the tax. Parties in the supply chain, including those storing or transporting the product and operators of online marketplaces or fulfilment businesses, can be made liable for any unpaid PPT if they knew or ought to have known that PPT was not paid at another stage in the supply chain. HMRC is due to issue guidance on how it will apply these rules, but it seems likely that it will expect businesses to have done some due diligence on suppliers and, possibly the product, if it is sold to them as recycled plastic. A particularly important point to be clarified in guidance is when HMRC will treat a person as “ought to have been aware” of a PPT default.

Practical steps

Businesses should start to consider the impact of PPT in relation to their supply chain contracts. In particular:

  • Is there taxable plastic packaging in the supply chain? – the majority of plastic packaging will be within the scope of the rules as the exceptions are limited. As the secondary liability rules apply to those storing and transporting packaging products, businesses in those sectors will need to consider the rules even though they might not be in the producer- end user supply chain. Businesses should also check whether they could be producers of packaging, or importers of packaging or packaged products, which could require them to register for PPT. A change in sourcing of products from UK supplier to imports could cause the business to be an importer and subject to registration for PPT.
  • Will recycled packaging be supplied? – the aim of the tax is to increase the amount of recycled packaging in supply chains. Packaging with at least 30% recycled content will not be subject to PPT. Although customers will therefore benefit from an increased volume of recycled packaging, businesses should ensure their contracts protect them from increased costs if the material turns out not to meet the recycled product definition. For example, a business may not want to pay its supplier for underpaid PPT if that cost cannot be passed on.
  • Who is bearing the cost of PPT? – a business will need to understand whether the price of packaging or products they are supplying will be increased to take account of PPT and whether they can pass the PPT cost onto their customers. Where businesses are buying packaging or products involving packaging directly from a producer or imported under an existing contract and that contract is “silent” on PPT (as it is likely to be), the producer or importer can pass on any PPT on products under that contract to the customer. Where a business has such contracts continuing past April 2022, they should be reviewed and if necessary renegotiated so they state whether the price is inclusive or exclusive of PPT. Contracts for on- supply of product should also be reviewed to establish whether any PPT paid can be passed on in the supply chain. Many supply contracts will not include provisions allowing additional supplier costs such as PPT to be charged to the customer.
  • Do contracts allow due diligence on suppliers and products? – HMRC’s interpretation of the “secondary liability” rules is likely to require businesses to do some due diligence on their supply chain. Contracts involving the supply, or transport or storage, of plastic packaging or packaged products, should therefore allow for businesses to require appropriate information from their suppliers to meet due diligence obligations and warranties as to recycled content (if relevant) and compliance with PPT.

How we can help

Businesses need to be considering PPT now, it should not be left until 2022. We can advise businesses on how PPT may apply in their supply chains, and the review and changes that may be needed to their contracts to ensure that they are ready for the PPT regime.

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