"It is harsh that quarry operators should have to pay these amounts when they were simply relying on an exemption that they thought was valid. However, the UK government is obliged by EU law to recover the amounts and it seems that the UK Courts cannot alleviate the burden," said Ian Hyde, a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com.
In March 2015 the European Commission decided that an exemption from the UK's aggregates levy for the commercial exploitation of shale and shale spoil contravened EU state aid rules. It ordered the UK to recover the "incompatible aid granted" as a result of the exemption, together with compound interest. The Commission said the aid to be repaid was the advantage that beneficiaries of the exemption obtained over their competitors as a result of the unlawful exemptions.
Quarry operator John Gunn and Sons Limited challenged a decision by HM Revenue & Customs (HMRC) that it was obliged to pay £1064,869 of unpaid levy and over £200,000 of interest. It argued that the only advantage it had gained from the levy was a repayment of levy of around £90,000 that was made by HMRC in 2016.
The company argued that the there was no lawful basis for HMRC to seek to recover the aggregates levy that would have been charged if the exemption had not been available. It said that the amount claimed did not represent the real financial advantage enjoyed by it as a result of the exemption because it had passed the financial advantage of the exemption to its customers. It argued that its competitors were other quarries in the local area and all these quarries benefited from the aggregates levy exemption so it had not had a competitive advantage as a result of the exemption.
In his opinion Lord Uist described the company's arguments as "both ingenious and unsound". He said it was "perfectly plain" that the amount to be recovered is what would have been paid as aggregates levy had the exemption not existed. He said the point about the local market was "without merit and irrelevant". He said "The European Commission does not think in terms of small local markets: it thinks in European terms of the entire single market."
Lord Uist said it was irrelevant that the company had passed the benefit of the exemption on to its customers. "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," he said.
However, the judge was critical of an alternative 'unjust enrichment' argument that had been made by the government. He said: "This action is about the application of EU law to the aggregates levy and I see no good reason for the inclusion of a case based on unjust enrichment, which raises considerations of equity which do not arise in the claim based on EU law."
He also dismissed a claim that the company's holding company should be jointly and severally liable for the repayment of the state aid. The holding company had not been registered for aggregates levy and so the judge said that there was no basis for HMRC's claim that it was jointly and severally liable for repayment of the state aid.
“This decision of the Court of Session is particularly unusual as it is rare to see a recovery action raised in the national courts. However that situation may change post-Brexit when the UK's Competition and Markets Authority takes on the Commission's role in regulating and enforcing State aid across the jurisdictions of the UK,” said Caroline Ramsay a state aid expert at Pinsent Masons.
The Commission's ruling on the shale exemption followed an investigation begun in August 2013 into whether a range of aggregates levy exemptions breached State aid rules. Following the launch of the investigation, the UK government suspended the relevant exemptions from 1 April 2014. The other exemptions were held to be lawful and were reinstated retrospectively to 1 April 2014.
The British Aggregates Association (BAA) has challenged the Commission's decision in the European Court. Aggregates levy was challenged by the BAA upon its introduction but this challenge was unsuccessful and the European Commission decided that the system of aggregates levy was compatible with EU law.
"UK groups who have relied on the finance company exemption in the CFC rules should take note of this decision. If the Commission decides that that exemption breaches state aid rules, these groups may be on the hook for large payments as the government will have no choice but to enforce recovery of the unlawful state aid. Even if we have left the EU by that stage, it seems likely that compliance with pre-Brexit rulings will be part of the divorce deal so Brexit is unlikely to get groups off the hook," Ian Hyde said.
The Commission opened an investigation in October 2017 into the 'group financing exemption', which partially exempts some offshore financing income from the application of the UK's controlled foreign company (CFC) rules. The CFC rules allow HMRC to reallocate profits arising in an offshore subsidiary back to the UK parent company, where they can be taxed accordingly.