HMRC succeeds in action to recover payment of ‘unlawful state aid’ granted to shale exploration company

A judge in the Court of Session granted decree in favour of HM Revenue and Customs in its claim for payment against John Gunn and Sons Ltd, following a European Commission decision to the effect that the exemption was “unlawful” and that the beneficiaries of it had to repay the aid in order to re-establish the situation in the market that existed prior to their granting.

Unlawful state aid

Lord Uist heard that the first defender, which extracts aggregate materials for the purpose of commercial exploitation, was registered as a person liable to pay the levy charged on the extraction of aggregate for commercial use under the Finance Act 2001, while the second defender was a holding company which owned the first defender.

The court was told that in late 2001 the United Kingdom notified the European Commission of its intention to introduce an aggregates Levy with effect from 1 April 2002, but two companies and the British Aggregates Association (BAA) submitted complaints arguing aggregates levy to be unlawful because it gave rise to state aid as a result of its reliefs or exemptions.

The complaint was originally dismissed but following an appeal the European Commission issued a final decision to the effect that while the levy itself was lawful, the exemptions gave rise to “unlawful and incompatible aid”, and in light of its obligations under TFEU and the Procedural Regulation the commission determined that the beneficiaries of the exemptions had to repay the aid, plus interest, which was the advantage that those beneficiaries obtained over their competitors as a result of the unlawful exemptions.

HMRC calculated that the first defender required to repay £1,064,869, representing the amount of unpaid levy for which it received the advantage of the unlawful exemptions, plus £206,956 in interest, but the company challenged that figure and the status of the final commission decision, claiming that the “financial advantage” it enjoyed was the refund of £90,598 that it received from HMRC after its application for a shale exemption was granted with retrospective effect.

‘Wholly unrealistic’ argument

However, the judge described the points made by the defenders about quantum as both “ingenious and unsound”.

In a written opinion, the judge said: “It is perfectly plain that the amount to be recovered is what would have been paid as aggregates levy by the first defenders had the exemption not existed. In other words, it is the amount of underpaid tax due now that the exemption has been found to be unlawful. Any other view is, in my opinion, wholly unrealistic… I conclude that the defenders’ challenge on quantum fails.”

He added that the interpretation of the final commission decision put forward on behalf of the defenders was “tortuous and untenable”.

He said: “What a recipient of state aid did or did not do with the financial benefit gained from the application of an unlawful exemption is immaterial as far as the commission is concerned. If the defenders were correct in their proffered interpretation it would mean that in every case the commission or the national court giving effect to the commission’s decision would have to undertake a detailed investigation into what the beneficiary of the unlawful exemption did with the benefit gained by him. That cannot be right. In each case the advantage received is the same: it is the amount of the Aggregates levy which was not paid as a result of the unlawful exemption. In my judgement the submission for the pursuer on this point is correct and must be upheld.”

Public interest

The defenders also argued that the approach contended for by HMRC breached the Human Rights Act 1998, in terms of its duty not “to act in a way which is incompatible with a European Convention right”, namely, the first defender’s Convention property rights which were protected by Article 1 of Protocol 1 (A1P1), as recovery would be an “unlawful interference” with the first defender’s possessions, being the difference between the advantage actually received by the first defender and the much larger sum that HMRC were seeking to recover.

However, the pursuer submitted that no violation of A1P1 arose and that it was in the “public interest” that the UK, including the Crown and the courts, effect recovery of the sums detailed in the commission decision and enforce the law on state aid.

The judge rejected the defenders’ human rights points as “without merit”, adding: “The United Kingdom has no alternative, under section 2(1) of the 1972 Act, but to seek the sums sought.”

However, the court considered that the pursuer’s alternative claim for “unjust enrichment” was neither necessary nor appropriate and held that it would not be equitable to order the first defender to make payment of the sums sought, given that the company did nothing that was considered to be wrong at the time at which the exemption applied.

Further, the judge absolved the second defender of any liability after ruling that the pursuer’s submissions that the defenders were jointly and severally liable were “irrelevant”, having proceeded upon a “fundamental misconception” about the nature of joint and several liability.

Lord Uist added: “The only party liable to pay aggregates levy was the first defender: the second defender was never at any time so liable. This action is an action to enforce payment of the aggregates levy which should have been, but was not, paid by the first defender. The second defender was never under any liability to the pursuer for aggregates levy at the material time, and cannot be made so liable now.”