Shale aggregate extractors lose appeal against payment to redress unlawful tax break

John Gunn and Sons Ltd argued that they should only have to pay the amount which represented the actual advantage the exemption had given them, rather than the full amount of the levy they would otherwise have paid. The Advocate General appeared as the respondent to the appeal. 

The appeal was heard in the Inner House of the Court of Session by the Lord President, Lord Carloway, sitting with Lord Woolman and Lord Doherty. 

Selective advantage 

The relevant tax, Aggregates Levy, was imposed by the Finance Act 2001 to comply with an EU directive on the commercial exploitation of rock, sand, or gravel, the intention being to discourage quarrying in favour of recycled materials. There were exemptions in the legislation for shale and shale spoil, which the appellants had been involved in extracting since before the 2001 Act came into force. 

Legal actions were raised by objectors to the Levy, who complained that it was unlawful because as a result of the exemptions it amounted to state aid. An investigation into the lawfulness of the exemption was commenced in 2013 by the EU Commission after the EU General Court annulled the Commission’s initial decision that the Levy was lawful. 

The exemptions were temporarily suspended with effect from 1 April 2014 and ultimately deemed unlawful by the Commission because they preferred those who extracted shale or shale spoil for use as aggregate over those who extracted other materials for the same use. They conferred a “selective” advantage and distorted competition in the local aggregates market. 

Both parties agreed that recovery of the unlawful state aid was required. The pursuer and respondent sought payment of £1,064,869 plus interest from the appellants, representing the sum they would have paid as Levy from November 2003 to 31 March 2014 had shale and shale spoil not been exempt. 

The defenders argued the advantage the exemption had given them was nil. They averred they had passed on the benefits of the exemption to their customers by not increasing their prices by the amount of the Levy. The recovery sought was therefore excessive and disproportionate. 

The Lord Ordinary who heard the case at first instance found in favour of the pursuer, with the appellants’ arguments as regards competition distortion having no merit. What a recipient of state aid did or did not do with the financial benefit, which he had gained from the application of an unlawful exemption, was immaterial. 

At the stage of the reclaiming motion, the defenders introduced a new defence, submitting that UK law imposed a time limit of four years for making an assessment to recover the Levy. Thus, only the Levy that ought to have been paid in the four years before the demand letter from HMRC ought to have been recoverable. 

Complying with requirement 

The opinion of the court was delivered by Lord Carloway. On the circumstances in which the pursuer’s demand was made, he said: “In seeking recovery of the sums ordered by the Commission, the pursuer is complying with a requirement made by an EU institution. The pursuer has no option to do otherwise. The United Kingdom is simply abiding by the terms of section 2(1) of the European Communities Act 1972.” 

He continued: “The deprivation, which the defenders will suffer, is justified in the public interest. It is subject to conditions provided for by law. It redresses unlawful state aid. A measure must strike a fair balance between the general interests of the community and the individual’s fundamental rights. There is no basis for concluding that the law relating to state aid, which is what is being enforced against the defenders, does not strike that balance.” 

Of the time exemption argument, he said: “The measure of the unlawful aid is the Levy which would have been paid but for the unlawful exemptions. It is state aid law (not tax law) which is the source of the authority to recover it and of the obligation to pay it. The object of recovery is to correct the distortion of the market, which the unlawful aid caused. The making of an assessment to the Levy is not analogous to the recovery of unlawful aid.” 

He continued: “Even if it were analogous, the principle of equivalence cannot be prayed in aid in order to defeat the recovery of unlawful state aid. The object of the principle of equivalence is to ensure that national procedural rules which apply when an individual seeks to enforce a right derived from EU law are not less favourable to enforcement of the right than the national procedural rules which apply to the enforcement of an analogous right derived from domestic law.” 

Lord Carloway concluded: “The recovery sought by the pursuer is what EU law requires and the pursuer has no option but to comply with it. The reclaiming motion must accordingly be refused. From the defenders’ perspective, this may seem hard. After all, the unlawful exemptions were the prevailing law at the material times. Nevertheless, the fact that they were unlawful state aid created distortion of the market. The consequences of that distortion require to be redressed.” 

For these reasons, the appeal was refused.