A company wrongly exempted from a levy, the exemptions ultimately being held to contravene EU law as unlawful state aid, will have to pay the full amount due, despite it claiming not to have benefited, the Inner House has ruled.

Lord President Carloway, Lord Woolman and Lord Doherty gave the decision in refusing an appeal by John Gunn & Sons Ltd in an action by the Advocate General on behalf of the UK Government to recover £1,064,869 plus interest in respect of aggregates levy which the defenders had not paid over the period from November 2003 to March 2014 as a result of two statutory exemptions.

The levy was introduced by the UK in 2002. After lengthy proceedings involving the European Commission and the EU Court of Justice, the Commission ultimately decided that exemptions relating to shale and shale spoil amounted to unlawful state aid because they were not justified in environmental terms, and gave extractors of such material an unfair advantage over other traders in aggregate. The Commission ordered the UK to recover the aid from the “beneficiaries”. The Lord Ordinary held that there was no defence to the action and granted decree as sought.

On appeal the defenders argued that they only had to pay the amount which represented the actual advantage which the exemption had given to them. This sum was nil, since they had passed on the benefit of the exemptions to their customers. Further, the pursuer, by seeking the larger amount, was in breach of article 1 of Protocol 1 of the European Convention on Human Rights (protection of property); he was acting unlawfully by breaching HMRC’s Policy Brief 11 (2015) on the reinstatement of certain aggregates levy exemptions; and the domestic time limit of four years applied.

Lord Carloway, delivering the opinion of the court, said the principle set out in a CJEU decision involving Aer Lingus and Ryanair (2017) was that the obligation on the state to recover such aid was “to restore the situation as it was before the aid was granted”. Repayment forfeited the advantage gained; recovery involved restitution of the advantage, not of any economic benefit. Where the aid was in the form of a tax advantage, recovery mean that the transactions had to be subject to the same tax treatment as would have been applied without the unlawful aid. It followed that the challenge to the assessment of the amount due must fail. 

In any event such challenge should have been made before the CJEU. Upholding the defenders' contention would amount to holding the Commission's decision unlawful, which the Court of Session had no power to do.

Regarding the Human Rights Convention, since EU law encompassed the Convention rights, there was a presumption that a state acting in accordance with EU law, with no discretionary element involved, was behaving in a Convention compliant manner unless the protection afforded to Convention rights was “manifestly deficient”. There was no breach of article 1 of Protocol 1 since the deprivation the defenders would suffer was justified in the public interest. 

The HMRC policy brief, which prevented recovery of levy paid if the cost had been passed on to customers, had no relevance to the present situation; nor did the four year limitation period applying to making an assessment to the levy, since the order was for recovery of state aid, which had a different purpose from an assessment to pay the levy and could not be treated as analogous to it.

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.”

Click here to view the opinion of the court.