Milk Supplies Ltd v Department for Environment Food & Rural Affairs

Under Article 4(3) of Council Regulation 2988/95, an advantage may be withdrawn where formal compliance with Community legislation is achieved by artificially creating the conditions for obtaining an advantage contrary to a particular objective of the applicable legislation. The relevant objective need not be the legislation’s overall purpose. Corporate arrangements may be assessed as a whole when identifying the advantage actually obtained. Artificiality is established where transactions have no commercial purpose other than securing the advantage. The export-refund penalty under Article 51(1)(a) of Commission Regulation 800/1999 does not require deception or negligence and may result in repayment where the net amount is negative. A company may be a beneficiary where it receives the economic benefit of payments made to a related company.

The claimant exported agricultural products through seven subsidiary companies and sought certificate-free export refunds available under the small-exporter scheme. The subsidiaries met the formal requirements, but substantially all refunds were passed to the claimant. The Department counterclaimed for repayment and penalties, alleging abuse of rights under the Community export-refund regime.

The issues were whether the arrangements pursued an advantage contrary to the objectives of the applicable Community legislation, whether the conditions for that advantage had been artificially created, whether the Article 51 penalty required dishonesty or negligence, and whether the claimant was a beneficiary liable to repay the sums.

1. Outcome. The court concluded that the Department was entitled to £140,951.62 plus interest. Although the concluding sentence stated that the counterclaim must fail, that wording is inconsistent with the stated entitlement and reasoning.
2. Abuse of rights. Article 4(3) of Council Regulation 2988/95 requires two elements: an act pursuing an advantage contrary to the objectives of the applicable Community law, and artificial creation of the conditions required to obtain it. Access to the small-exporter scheme was a relevant advantage. The relevant objective was the reservation of part of the export-refund funds for small exporters, rather than the overall objective of the agricultural regime.
3. The subsidiaries’ interposition was assessed by reference to the whole transaction. Since substantially all refunds were paid to the claimant, the arrangements secured an advantage for it without lifting the corporate veil. The transactions had no commercial purpose other than obtaining the refunds, so the conditions for payment to the claimant had been artificially created.
4. Penalty and legal certainty. The penalty in Article 51(1)(a) of Commission Regulation 800/1999 was not contingent on deception or negligence. Article 51(4) applied the same principle where the calculation produced an amount payable to the authorities. The statutory scheme, read with Article 4(3) of Council Regulation 2988/95, provided a sufficiently clear legal basis.
5. Beneficiary. Article 52 was wide enough to include a company receiving the economic benefit of an over-payment to a related company. The claimant benefited by receiving cash which it would otherwise have obtained through its own refunds application.