The plastic tax isn’t working… is it?

It was billed as a key weapon in the war on plastic. A means to cut waste by taxing companies for any packaging containing less than 30% recycled plastic. It would, the government said, boost recycling and divert plastic away from landfill and incinerators.

Yet three months in, it’s not going entirely to plan. Industry critics have branded the tax a “shambles”, blown off course by soaring material prices and blinkered HMRC rules that are allegedly stymieing innovation.

Meanwhile campaigners fear the new rules are creating an artificial ceiling that will inhibit recycling levels from hitting the desired levels.

“It’s more commercially advantageous to use virgin material and take the hit on the tax”

The problems started back in March, when just weeks before the tax was due to come in, industry figures began flagging that skyrocketing prices for food-grade recycled plastic were wreaking havoc on their plans, with the costs of recycled plastic polymers having shot up by as much as 100% in a year.

On top of rising prices, the availability of recycled plastics – particularly PET and HDPE used for drinks bottles and containers – was leaving many manufacturers in a bind.

“The availability of recycled plastic materials has become incredibly tight,” warns one leading supplier, explaining it is a situation caused both by the extra demand due to the plastic tax, as well as the strain on supplies affecting all of Europe.

While the big major food and drink companies are able to use their financial muscle to buy what they need, the source says, for many smaller companies the cost of the recycled material is so great they are deciding to take the hit and pay the tax.

At £200 per tonne for any packaging that contains less than 30% recycled plastic, this is no minor cost to a small business. Yet it could also mean that HMRC’s estimate that the tax will cost businesses a total of £235m in its first year is a serious underestimate. “The government claims it is driving change, but the reality is it’s a very blunt instrument,” says the supplier.

Jon Brookes, partnership director at Ecosurety, the producer responsibility compliance scheme, is inclined to agree. “Lots of businesses are in a position where it is more commercially advantageous to use virgin material and take the hit on the tax, instead of trying to procure recycled content.”

While he maintains that the introduction of the tax has been a “catalyst” for many businesses to try and boost their use their of recycled materials, they are currently limited not only by the cost and availability of recycled plastics, but by food safety rules that severely restrict which recycled plastics can be used for food and drink products.

“There is a definite drive to increase recycled content,” Brookes says. “But there are plenty of cases where companies are constrained by the available quality of recycled content in relation to food safety requirements and the economics are not stacking up.”

Food and drink companies are still in a better position than they would have been a few years ago. In 2021, the amount of plastic recycled in the UK hit 590,000 tonnes, up from 480,000 tonnes the year before and 330,000 tonnes five years ago. “That’s partly down to the impact of the plastic tax, and we see that as a positive thing,” says Barry Turner, director of plastics and flexible packaging at the British Plastics Federation.

“Clearly something needed to change in the UK. If you go back to 2017, we only recycled 34% of plastic in the UK, and last year that went up to 53%. Companies like Biffa and Viridor have made big investments in recycling infrastructure.”

But Turner says despite the tax’s positive impact on recycling infrastructure, the government’s fiscal measure is a “politically motivated tax” which is having “huge” unintended consequences.

“We have a situation whereby clearly the market is being dominated by the big brands. If Unilever or P&G decide they want to have a certain level of material in their products, they have the resources to do so. But the same is not true for smaller players. We put it to HMRC that the tax should be reinvested to incentivise the industry more widely.”

Small companies meanwhile are facing a situation in which an already tight economic situation is made worse by the tax, and means that although the use of products containing 30% recycled content has increased, this is only happening if companies can make it cost neutral to their bottom line, according to Sally Molyneux, sales director UK & Ireland for global packaging manufacturer Klöckner Pentaplast.

There is also confusion about who pays the tax, she adds. “We are seeing imports of products from Turkey and China that do not carry a plastics tax levy, which means UK manufacturing is suffering from cheaper imported goods. This could lead to some large fines or tax bills for businesses that are unaware they have been designated the ‘importer’ in the supply chain.”

Red tape

And the problems don’t end there for small businesses. For with manufacturers having to report on their first returns by the end of July, many are now struggling with the huge administrative burden involved, says Ruth Beckley, director of customer compliance and service at Valpak.

“Brands need to report on the recyclability of each element. This is no mean feat. For example, the range of multipacks of milkshake sold in the UK include 13 different plastic elements – from bottles and bags to caps, labels and films. Some businesses will need to gather thousands of documents from a large number of suppliers if they are to successfully evidence recycled content and lower their tax liability.”

The problem is that many businesses aren’t even aware of what is going on. Over three-quarters of customers surveyed by Valpak, an environmental compliance company, said they had never even heard of the tax and two-thirds said they were not fully prepared for what needed to be done.

Beckley says the volume of red tape involved is a huge barrier, especially for small companies with limited resources to handle it. “Anyone who is importing goods into the UK is going to face a huge challenge to come up with a reliable audit trail.”

Even the biggest food companies in the UK are now warning the tax can be a minefield. In May, soft drinks giant Suntory, which makes the likes of Lucozade and Ribena, announced a pledge to make all its on-the-go 500ml bottles from 100% recycled plastic by the end of the year.

It warned, however, that Europe would need three times more recycled plastic if all soft drinks manufacturers were to make the switch, saying 3.5 million tonnes more would be needed – equivalent to around seven times the UK’s currently recycling capacity.

Britain’s biggest supermarket is also having problems. Tesco may be one of several major retailers ramping up its use of soft plastic recycling collections at stores across the UK, but it still found itself pilloried recently by cross-party MPs and environmental campaigners for allegedly exploiting the tax by allowing chemical recycling to count towards plastic recycling targets.

“Industry players such as Tesco are using chemical recycling as a quick win to meet plastic recycling targets despite the carbon-intensive nature of the process,” said Plastic Planet in a statement backed up by MPs including the environmental audit committee member Matthew Offord, Labour’s Geraint Davies, SNP environment spokesperson John McNally and former Green Party leader Caroline Lucas.

The group claims that under HMRC’s rules for the plastic tax, processes such as chemical recycling which Defra classes under “incineration” were being used by Tesco and others as recycling, despite those processes causing huge amount of pollution and environmental damage. Chemical recycling, they argue, releases around 50% of the carbon from plastics as greenhouse gases and yields less than 10% of its original value in new content.

“This is a pivotal moment for the Treasury to defend the integrity of its own plastics tax,” says Lucas, MP for Brighton Pavilion. “If major plastic producers are allowed to use chemical recycling as a way of avoiding paying tax on plastic items, the whole system fails.”

The Treasury has made “grandiose” claims about this tax, hailing it as world leading in the fight against plastic pollution, Lucas continues, but “if Rishi Sunak really wants this to be the case then he must stop pandering to major plastic producers and acknowledge the harmful environmental impacts of chemical recycling. This starts by recognising it as incineration – not recycling.””

Yet the BPF’s Turner says such criticism misrepresents the efforts leading food companies are making. Rather than companies like Tesco exploiting loopholes, he suggests HMRC rules which place “impossible” reporting requirements on the reuse of chemical recycled materials in the packaging chain are killing off any financial incentive for companies to invest in new packaging materials.

When Tesco first revealed trials on technology allowing oil converted from soft plastic to be turned into plastic pellets to in turn be used as a replacement for plastic packaging on cheese, using a method called pyrolysis,it was hailed as a major breakthrough by the supermarket and sustainability body Wrap.

Yet Turner says despite strong lobbying from industry bodies, companies are now being taxed on materials made from chemical recycling. “In the Finance Bill the government permitted chemical recycling, but they are insisting on a level of reporting on the source of the material that means it effectively cannot be classed as a recycled material.”

The issue, explains Turner, is that chemical recycling does not allow materials to be tracked all the way through the process from input to output and therefore does not fall within the necessary conditions to be classed as ‘recycled’.

“The allocation method allocates the pyrolysis oil input to the cracker (the refining machine used to carry out the process) to particular customers using a mass balance method. But you cannot use the blending of segregation method for chemical recycling due to the scale issue and the inability to track the input to a particular output.

“So on the one hand, government is saying it wants to incentivise companies to invest in new replacement materials for food contact, and on the other it is taxing companies for doing it. It’s a huge problem,” Turner says.

“If people like Caroline Lucas had taken this same approach to green energy it would never have happened. It’s a similar process when you think about it, as you cannot tell the difference between electrons on the grid produced by green energy and fossil.”

Turner claims the ultimate irony of the tax is that companies investing in chemical recycling plants in the UK are now threatening to turn their back on the country, even though in some cases they have been part-funded by government grants.

“It is likely the tax will need to be escalated”

Yet even the British Plastic Federation’s own Roadmap suggest by 2030 chemical recycling will still only account for 7% of recycled plastic, and despite its early problems, some are already suggesting the plastic tax will have to be tightened to incentivise companies to switch materials.

“The tax is certainly helping to direct industry focus onto plastics where it is currently not possible to include recycled content, including food grade polypropylene and plastic films,” says Helen Bird, Wrap’s strategic engagement manager. “However, in its current state it may not be enough to stimulate the market to adopt post-consumer recycled content at the levels that it should. “Wrap believes the tax should push the boundaries on what is current standard industry practice.

Instead, Bird argues that non-mechanical recycling methods such as chemical process need to be counted as recycled plastic, but the economics required to support advanced recycling technologies will also need to be monitored.

In the meantime, Bird is concerned that the 30% benchmark for recycled materials could create an artificial ceiling for companies’s ambitions, particularly as the prices for recycled plastic soar, and this should be kept under review. . “It is likely the tax will need to be escalated in years to come to ensure that it drives enough of a financial incentive.”

According to a government spokesman, the plastic packaging tax provides a “clear incentive” for businesses to use more recycled plastic while protecting the smallest businesses. He says it is expected to increase the use of recycled plastic by around 40% next year.

“It comes alongside major reforms to boost recycling and tackle litter including the UK’s Packaging Producer Responsibility system and introducing a new Deposit Return Scheme for drinks containers,” he adds.

Yet with HMRC dragging its feet and campaign groups deeply suspicious of the industry’s latest moves on plastic, the plastic tax and the economic backdrop currently appear to raise as many barriers as incentives.

Is the tax a catalyst for change, a political gimmick gone wrong, or a black hole into the coffers of the taxman? One thing is clear: in its current form, the plastic tax isn’t working.