UK court rules withdrawal of LECs lawful

The English High Court has ruled that the UK Government’s withdrawal of the exemption from the Climate Change Levy (“CCL”) for renewable source electricity was not unlawful. The exemption from the CCL for renewable source electricity was introduced in 2001 to allow renewably sourced electricity to be exempt from the CCL, which is levied on electricity supplied to businesses and the public sector. The removal of the exemption was announced on 8 July 2015 and became effective on 1 August 2015. In R (on the application of Drax Power Limited and Infinis Energy Holdings Ltd) v HM Treasury and HM Revenue and Customs [2016] EWHC 228 (Admin) the claimants unsuccessfully sought to argue that the timeframe for its withdrawal was so short (24 days) that it was unforeseeable, disproportionate, and an unjustified interference with their property.

Facts

The application for judicial review was brought by Drax Power Limited (“DraxInfinisClaimantsDefendants”) and Infinis Energy Holdings Limited (“” and together the “”) against HM Treasury and HM Revenue and Customs (the “”). Drax is a power generator, and it owns the largest power station in the UK, currently providing electricity to meet 7-8% of the UK’s electricity needs. Infinis is the leading independent renewable energy generator, producing some 5% of the UK’s electricity needs.

On 8 July 2015, the Chancellor announced in his Summer Budget Statement that the exemption for renewable source electricity (“RSE Exemption”) would be withdrawn. The withdrawal was given effect by a resolution of the House of Commons on 14 July 2015, which had temporary statutory effect. CCL Levy Exemption Certificates ceased to be issued by Ofgem for electricity generated after 1 August 2015.

The removal of the RSE Exemption with so little notice came as a surprise to industry. On the day Drax PLC announced the removal to the market, it lost 28% of the value of its shareholding. Infinis Energy PLC lost 26% of its market value over the period 8-10 July 2015.

The Summer Budget Statement had no immediate legal consequences. However, a resolution of the House of Commons passed on 14th July 2015 gave the Summer Budget Statement temporary statutory effect, by virtue of section 1 of the Provisional Collection of Taxes Act 1968.

Under English law, statutes can only be judicially reviewed under European Union law and the Human Rights Act 1988. It was these that formed the basis of the Claimants’ challenge. The Claimants sought an order from the court that the resolution of the House of Commons was, in short, unforeseeable, disproportionate, and an unjustified interference with their property.

Arguments

The Claimants argued that the decision to make the removal of the RSE Exemption effective so quickly violated:

(a) EU law principles of foreseeability, legal certainty, and the protection of legitimate expectations;

(b) the EU law principle of proportionality;

(c) the Claimants’ rights under Article 1 of Protocol 1 of the European Convention on Human Rights (a right to peaceful enjoyment of property).

The Claimants’ case for each of these arguments can be briefly summarised as follows.

Foreseeability

The Claimants argued that the removal of the RSE Exemption was not foreseeable, because they had a legitimate expectation that government policy on this would not be changed without a two year lead time. That two year period was argued by reference to previous changes in government policy where a two year lead time was given. The Claimants argued that a prudent and circumspect operator could not have foreseen the removal of the RSE Exemption, the business community as a whole had made investment decisions on the availability of the relief into the 2020s, and the reaction of the industry to the change (share value reductions) was evidence of the fact that the withdrawal was not foreseen.

The Defendants argued that the Claimants could not point to a specific assurance or indication by the Government that the benefits conferred by the RSE Exemption would enure to the Claimants for at least two years following their statutory appeal. Following Planatol GmbH v Hauptzollamt Darmstadt [2009] ECR-108343, the Claimants are required to show a “precise and unambiguous” promise by the Government, and that the Claimants must have taken specific steps as a result of the assurance which gave rise to the expectation that the RSE Exemption would not be removed without a two year lead-in time. The Defendants argued that no such steps were taken. On the contrary, the Defendants argued that the Claimants had made provisions for changes in the fiscal environment in the Claimant’s relevant supply contracts, which contained change of law provisions.

Proportionality

The principle of proportionality is a general principle of EU law. In a 2015 decision of the Supreme Court, Lords Reed and Toulson explained that the principle involved, firstly, considering whether “the measure in question is suitable or appropriate to achieve the object pursued”, and secondly, “whether the measure is necessary to achieve that objective, or whether it could be obtained by some less onerous method” (R (Lumsdon) v Legal Services Board [2015] 3 WLR 121).

The Claimants argued that no sound reason was given to remove the RSE Exemption, and the Defendants took into consideration numerous errors and misunderstandings in reaching their decision.

The Defendants gave numerous policy reasons for removing the RSE Exemption, including that the Government had been moving away from a system of indirect support for renewables to a system of direct support on grounds of efficiency and cost-effectiveness. Importantly, the Defendants argued that the reason why the RSE Exemption had to be removed with close to immediate practical efficacy was that “the burden on the Exchequer, even in the short-term, was such that an inefficient, outmoded exemption, of admitted value to LEC holders, could not survive”.

A right to peaceful enjoyment of property

The Claimants finally argued that the removal of the RSE Exemption was a disproportionate interference with their right to enjoyment of their property. The property rights in issue were concluded contracts with purchasers, as well as marketable goodwill.

Decision

Mr Justice Jay rejected all three of the Claimants’ arguments.

In response to the Claimants’ first argument – that the removal of the RSE Exemption was not foreseeable – Jay J said that the Claimants cannot succeed unless they established that the Defendants promoted a legitimate expectation of there being no withdrawal of the RSE Exemption without a two year lead time. Logically, said Jay J, proof that legitimate expectations must have been promoted is clear: the principle “cannot depend merely on a generalised sense of unfairness, and must logically require that Government has said or done something in particular such as to generate specific expectations in individuals or groups of persons which EU law demands will be honoured”. Jay J was not able to conclude that a “reasonable and prudent” operator could have drawn that inference from Government. As the Claimants failed to establish the promotion of a legitimate expectation, it was not necessary for Jay J to determine whether the promotion of a legitimate expectation would have been sufficient for the appeal to succeed, which would have involved resolving the tensions within EU case law in this area.

In response to the Claimants’ second ground – that no sound reason was given for the lack of a lead in time for the removal of the RSE Exemption and it was thus disproportionate – Jay J held that the removal was sufficiently justified. The reason why the removal required immediate efficacy was that the burden on the Exchequer was too great for the RSE Exemption to survive. Jay J also held that, in considering the evidence before him, the Defendants had put forward a reasonably compelling case that the reform was justified in the public interest, and that HMRC and the Treasury had had sufficient regard to the detail of the issues surrounding the removal in reaching their decision to do remove it.

In response to the final issue, Jay J argued that there had been no disproportionate interference with their property interests contained in their supply contracts and marketable goodwill, because the decision to remove the RSE Exemption was not made disproportionately.

He did however agree with the Claimants that the decision was within the scope of EU law.

Comment

It is interesting to see a case in the sector brought against primary legislation, which was traditionally beyond the scope of judicial review. Whilst the case was unsuccessful, this seems to have less to do with the case involving a challenge to primary legislation and more to do with the bar to any judicial review being high. Importantly, Jay J did find that the decision was within the scope of EU law, opening up future challenges to primary legislation in the energy sector on the grounds of incompatibility with EU law.

Jay J also made some interesting observations about whether assurances given by a previous administration can bind the current administration, with its own democratic mandate, and/or Parliament. However, he left this point unanswered.

He also rejected the Defendants’ submission that the existence of change of law clauses in the claimants’ contracts meant that they could not demonstrate an interference with contractual rights for the purposes of Article 1 Protocol 1 of the European Convention on Human Rights. Jay J considered that contractual rights might be interfered with under the Article 1 Protocol 1 of the European Convention on Human Rights, notwithstanding provision in a contract that addresses change in law.