Advocate General for Scotland v Gunn and Sons Ltd and Another

JurisdictionScotland
Judgment Date13 April 2018
Date13 April 2018
CourtCourt of Session (Outer House)

Court of Session (Outer House)

Lord Uist

Advocate General for Scotland
and
Gunn and Sons Ltd & Anor

MacIver; Office of the Advocate General

Lindsay QC; Harper McLeod LLP

Aggregates Levy – Levy not paid on shale due to exemption – Exemption subsequently found to be unlawful state aid contrary to EU rules – HMRC made a claim to recover levy – Appeal by taxpayer dismissed.

The Court of Session heard an appeal against actions by HMRC to recover unpaid aggregates levy. The levy was not paid at the proper time due to an exemption in UK law which the European Commission subsequently found was illegal state aid prohibited under European Union rules.

The defenders were a trading company which operated a business supplying aggregates to commercial customers and its holding company, which HMRC held jointly and severally liable for the levy.

The defenders challenged the quantum of the assessment. Their arguments included the point that they had not benefitted from the full exemption because savings had been passed to their customers.

The Court dismissed the challenge to the quantum of the assessment describing the defenders' arguments as “ingenious and unsound” (para. 28). The Court also described the defenders' attempt to interpret the European Commission's ruling differently to HMRC as “tortuous and untenable” (para. 36).

Arguments that the assessment was a breach of the defender's human rights were also dismissed. The Court did agree that the holding company could not be held jointly and severally liable for the levy.

The Court concluded that the first defender (i.e the trading company) was required to repay the amount of aggregates levy from which it had been unlawfully exempted.

DECISION
Introduction

[1] In this action the Crown seeks to recover from the defenders the value of unlawful and incompatible State aid granted to the first defender in the form of exemption from payment of Aggregates Levy of the commercial exploitation of shale and shale spoil. The first defender is a limited company which extracts aggregate materials for the purpose of commercial exploitation and is registered as a person liable to pay the levy charged on the extraction of aggregate for commercial use under the Finance Act 2001 as amended. Included in its activities since before 2002 has been the extraction of shale and shale spoil and its commercial exploitation as aggregate. During the period in which it has quarried aggregate in the United Kingdom the first defender has been included in the register of persons that are subject to the levy. The second defender has owned the first defender since before 2002. The case called before me on the Procedure Roll on the pleas to the relevancy of both the pursuer and the defenders.

State aid

[2] Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) provides:

Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the internal market.

Article 107(2) outlines the types of aid which shall be considered compatible with the internal market. Article 107(3) outlines the types of aid which shall be considered incompatible with the internal market. Neither provision is relevant in the present case. The granting of unlawful and incompatible aid distorts the internal market as it gives the recipient of the aid an unfair and unjust advantage over its competitors and also, in certain cases, deprives the State of funds which should have been made available to it.

[3] Article 108 TFEU, insofar as relevant to the present proceedings, provides:

2. If, after giving notice to the parties concerned to submit their comments, the Commission finds that aid granted by a State or through State resources is not compatible with the internal market having regard to article 107, or that such aid is being misused, it shall decide that the State concerned shall abolish or alter such aid within a period of time to be determined by the Commission.

If the State concerned does not comply with this decision within the prescribed time, the Commission or any other interested State may, in derogation from the provisions of articles 258 and 259, refer the matter to the Court of Justice of the European Union direct.

3. The Commission shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid. If it considers that any such plan is not consistent with the internal market having regard to article 107, it shall without delay initiate the procedure provided for in paragraph 2. The Member State concerned shall not put its proposed measures into effect until this procedure has resulted in a final decision.

Section 2(1) of the European Communities Act 1972 (the 1972 Act) provides:

All such rights, powers, liabilities, obligations and restrictions from time to time created or arising by or under the Treaties, and all such remedies and procedures provided for by or under the Treaties, as in accordance with the Treaties are to be given legal effect or used in the United Kingdom shall be recognised and available in law, and be enforced, allowed and followed accordingly …

Aggregates Levy

[4] On 20 December 2001 the United Kingdom notified the European Commission of its intention to introduce an Aggregates Levy with effect from 1 April 2002. Two companies and an association called the British Aggregates Association (BAA) submitted complaints to the European Commission arguing Aggregates levy to be unlawful because it gave rise to State aid as a result of its reliefs or exemptions.

[5] On 24 April 2002 the European Commission decided to raise no objection to the Aggregates Levy (the initial decision). It determined that the exemptions were justified by the logic of the tax and therefore did not open a formal investigation under article 108 TFEU, on the ground that the Finance Act 2001 did not give rise to State aid. On 12 July 2002 the BAA initiated proceedings for annulment of the initial decision. On 13 September 2006 the General Court dismissed the proceedings in their entirety. On 27 November 2006 the BAA appealed the judgment of the General Court. On 22 December 2008 the Court of Justice set aside the appealed judgment and referred the case back to the General Court. On 7 March 2012 the General Court annulled the initial decision on the ground of errors in the Commission's original assessment. The Commission therefore had to reassess its decision to raise no objection to the levy.

[6] By letter dated 31 July 2013 the Commission confirmed that the levy itself was lawful but at the same time informed the United Kingdom that it had decided to initiate the formal investigative procedure in respect of certain exemptions, exclusions and reliefs (including those measures which it subsequently decided to be unlawful exemptions). In its final decision it concluded that:

… the exemptions from the AGL granted for (i) material wholly or mainly consisting of shale that is deliberately extracted for commercial exploitation as aggregate, including here shale occurring as a by-product of fresh quarrying of other taxed materials; and (ii) spoil of shale that is deliberately extracted for commercial exploitation as aggregate, which have been unlawfully implemented, represent State aid that is incompatible with the internal market.

[7] In light of its conclusion that the exemptions in question 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, in order to re-establish the situation in the market that existed prior to their granting. The aid to be repaid was the advantage that those beneficiaries obtained over their competitors as a result of the unlawful exemptions, subject to certain exceptions. The Recovery Order issued by the Commission provides as follows:

Article 5

1. The United Kingdom shall recover the incompatible aid granted under the scheme referred to in article 1(1) from the beneficiaries.

2. The aid to be recovered shall include interest from the date on which it was put at the disposal of the beneficiaries until their actual recovery.

3. The interest shall be calculated on a compound basis in accordance with Chapter V of Commission Regulation (EC) No 794/2004.

Article 6

1. Recovery of the aid granted under the scheme referred to in article 1(1) shall be immediate and effective.

2. The United Kingdom shall ensure that this Decision is implemented within four months following the date of notification of this Decision.

The BAA has launched the following applications: (i) for annulment of the decision to open a formal investigation; and (ii) for annulment of the Final Commission Decision. There are also domestic proceedings which are stayed pending the European proceedings. The existence of these proceedings does not alter the obligation on the United Kingdom to recover the State aid found to be unlawful (Commission notice on the enforcement of State aid law by national courts 2009/C 85/01).

[8] From April 2002 the first defender was engaged in activity benefiting from the unlawful exemptions. It did not pay aggregates levy in respect of that activity. On 23 June 2015 Her Majesty's Revenue and Customs (HMRC) sent a questionnaire to the first defender asking for information which would enable assessment as to whether it would require to pay unlawful aid, and, if so, how much. Based on the information provided, and on returns provided by the first defender, it was calculated by HMRC that the first defender must repay (a) £1,064,869 representing the amount of unpaid levy for which it received the advantage...

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