Milk Supplies Ltd & Ors v Department for Environment, Food & Rural Affairs

In an export-refund scheme, ‘the beneficiary’ of refunds unduly received is identified by substance and fact. It can include a parent company that participated in an abusive arrangement, caused wholly owned subsidiaries to obtain refunds, and received the economic benefit, even though the subsidiaries were the exporters and direct recipients.

Where abuse of rights means that no refund was applicable, the penalty mechanism in Article 51 of Commission Regulation 800/1999 applies. A 50 per cent penalty can arise without dishonesty or intentionally false information. Article 52.1 also makes the beneficiary responsible for reimbursing the applicable penalty. Legal certainty does not prevent that result where the statutory basis is clear and unambiguous.

Milk Supplies Limited claimed legitimate export refunds for 2007 exports. DEFRA admitted that claim but counterclaimed against MSL and seven wholly owned subsidiaries for refunds received on earlier exports, penalties and interest, alleging abuse of rights. MSL had arranged for subsidiaries to use the small-exporter scheme and pass substantially all refunds to it.

Plender J, in [2009] EWHC 503(QB), dismissed MSL’s claim, held the subsidiaries liable for repayment and penalties, and held MSL jointly and severally liable as the beneficiary. The appeal concerned whether MSL was a beneficiary under Article 52.1, whether Article 51 imposed penalties on the subsidiaries, and whether Article 52.1 extended those penalties to MSL.

Lord Justice Aikens gave the judgment of the court. Lord Justices Longmore and Sedley agreed. The appeal was dismissed.

1. Abuse of rights. The accepted Community-law doctrine requires objective circumstances showing that formal compliance with the rules has failed to achieve their purpose, together with a subjective intention to obtain an advantage by artificially creating the conditions for it. The arrangements had no purpose other than obtaining refunds for the subsidiaries and transferring substantially all of them to MSL. The exports were genuine, and there was no finding of dishonesty or sham, but the arrangements nevertheless constituted abuse of rights. The court referred to Emsland Stärke v Hauptzollamt Hamburg-Jones [2000] ECR I-11569 and Halifax and Others v Commissioners of Customs and Excise [2006] ECR I-1609.
2. Beneficiary. Article 52.1 of Commission Regulation 800/1999 operates in the context of penalties and recovery of overpayments. ‘The beneficiary’ means the entity which benefited from refunds unduly received, and identification of that entity is a question of fact. On the findings, MSL had participated in establishing the scheme, received the refunds from its wholly owned subsidiaries and retained the practical benefit. It was therefore the beneficiary, although the subsidiaries were the exporters and direct recipients. The conclusion was firmly fact-specific, and none of the Article 52.4 exceptions applied.
3. Penalty against the subsidiaries. Abuse of rights meant that the refund applicable to the exports was zero. The subsidiaries had therefore applied for more than the applicable refund. Article 51.1(a) required the refund due to be reduced by half the difference between the amount applied for and the amount applicable. Article 51.4 required the resulting negative amount to be paid. Each subsidiary was consequently liable for a penalty equal to 50 per cent of the refund obtained.
4. Legal certainty. The court rejected the argument that legal certainty, or Articles 4.3 and 4.4 of Council Regulation 2988/95, prevented the penalties. Article 51 was clear and unambiguous. It imposed penalties where the refund applied for exceeded the applicable refund, including where the excess resulted from abuse of rights rather than intentionally false information.
5. Parent’s liability for penalties. Article 52.1 provides that reimbursement by the beneficiary includes any penalty applicable under Article 51.1 and interest. MSL was therefore liable to reimburse the penalties for which the subsidiaries were liable, in addition to the refunds and interest. The judge’s orders were upheld.

• Court of Appeal (Civil Division): The appeal from Plender J’s order dated 20 March 2009 was dismissed.
• High Court: In [2009] EWHC 503(QB), Plender J dismissed MSL’s claim and ordered MSL and the subsidiaries to pay DEFRA sums representing overpaid refunds and penalties.