The UK has been hit with a EUR 32m penalty by the Court of Justice of the European Union (CJEU). The judgment represents the first example of the UK being pursued by the European Commission (the Commission) for a failure to comply with a CJEU ruling under Article 260(1) of the Consolidated version of the Treaty on the Functioning of the European Union (TFEU).
In this article, Edward Rees takes a look at the CJEU judgment in European Commission v UK Case C‑692/20, ECLI:EU:C:2023:707 (28 September 2023) and the insights it gives us into how the Commission and the CJEU could approach future questions of non-compliance, enforcement and penalties in the event of future alleged breaches of Eu law. This is particularly relevant to the UK and its obligations under the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (the Withdrawal Agreement), its Northern Ireland Protocol and 2023’s Windsor Framework.
What are the practical implications of this case?
The continued application of EU law in Northern Ireland by way of the Withdrawal Agreement, Northern Ireland Protocol and Windsor Framework is an ongoing hot topic.
Northern Ireland’s special status means that EU law remains in force in what is a relatively small part of the UK, both geographically and economically. In relative contrast, there is significant potential liability for the UK (as a whole) in monetary penalties for breaches of EU law within Northern Ireland.
This CJEU decision confirms the principles for calculating monetary penalties for breaches – these will be set by reference to UK GDP, not Northern Ireland’s GDP. This is in line with previous CJEU case law, in which the court held even where a breach of EU law related only to the Basque country, it was the GDP of Spain as a whole that was taken into account when calculating penalties for the breach (Commission v Spain (C‑610/10, EU:C:2012:781)). We now know that this principle also applies to the UK as a non-Member State. The UK remains responsible for the ongoing enforcement of EU law within Northern Ireland and the EU’s penalties for non-compliance, where imposed, will be set by reference to UK GDP and be dissuasive, proportionate and within the ability of the UK (as a whole) to pay.
What was the background?
The proceedings stem from a multi-year dispute between the UK and the Commission regarding Directive 95/60 (the Directive). The Directive, alongside directive 2003/96, sets out measures for ‘fiscal marking’ of fuels with special dye according to its tax exemption status. For example, fishing vessels may use tax-exempt marked fuel, but private pleasure craft must use unmarked fuel, which is subject to tax at the full rate. Fuel marking allows Member State tax authorities to easily and quickly identify the correct tax treatment.
The UK had infringed the Directive by allowing the use of marked fuels for private pleasure craft, as determined by the CJEU on 17 October 2018 (C-503/17) (the 2018 Judgment).
In 2020, the Commission alleged the UK had had contravened Article 260(1) TFEU by not taking the necessary measures to comply with the 2018 Judgment. On 15 May 2020 the Commission sent the UK formal notice requiring compliance within four months, being 15 September 2020 (the Notice).
Since the 2018 Judgment, the UK had been in discussions with the Commission, explaining that, among other things, compliance would require both primary and secondary legislation, a consultation and infrastructure works at Northern Irish ports. The UK also cited the 2019 General Election as a reason for the difficulties of timely compliance. In the interim, UK’s ‘transition period’ under the Withdrawal Agreement ended on 31 December 2020. From 1 January 2021, the Directive remained in force only in Northern Ireland, from which date the infringement only concerned private pleasure craft refuelling at Northern Irish ports.
Ultimately, the UK did not fully comply with the 2018 Judgment until the entry into force of legislation on 1 October 2021. This was after the Commission had initiated proceeding under Article 260(1) TFEU on the back of the Notice, and before the CJEU had examined the facts.
What did the CJEU decide as to the UK’s obligations under Article 260(1) TFEU?
The UK had failed to fulfil its obligations under Article 260(1) TFEU (read in conjunction with Articles 127 and 131 of the Withdrawal Agreement) because, by the expiry of the Notice on 15 September 2020, it had not taken all measures necessary to comply with the 2018 Judgment. While the UK had by that date taken steps towards compliance by passing legislation, full compliance was not achieved until that legislation came into force on 1 October 2021.
The CJEU did not accept the UK’s counter-arguments – it held, among other things, that:
- the Commission did not need to prove compliance was possible by 15 September 2020;
- the Commission was not premature in serving the Notice nor bringing these proceedings; and
- the Commission’s four-month notice period was not unreasonable nor insufficient, in particular because the Notice expired 23 months after the 2018 Judgment.
What did the CJEU decide on the appropriate penalty?
The CJEU confirmed that, with any individual infringement, it has a wide discretion to determine whether to impose a lump sum payment and its amount. In setting the amount, the CJEU and will take account of all the relevant factors relating to the characteristics of the infringement, the conduct of the infringing State and the dissuasive effect of a penalty. Following existing case law, the CJEU considered, among other things, the seriousness of the infringement and the UK’s ability to pay.
Seriousness
In the CJEU’s view, the full transposition of directives is a “fundamental obligation” of Member States and the UK’s failure in this regard was a serious infringement. The Directive’s measures are “necessary and indispensable” for the attainment of the EU’s internal market and the CJEU considered it irrelevant that the UK had established other means to (eventually) verify the correct tax had been paid.
Of the mitigating circumstances put forward by the UK, the CJEU did not accept:
- that the “practical difficulties” cited (including legislative procedures, the general election, public consultations, geographic features, varying port sizes, difficulties in supplying both marked fuel and unmarked fuel, economic and safety concerns and the COVID-19 pandemic) were relevant; and
- that the UK’s cooperation with the Commission showed an intention to remedy the infringement as soon as possible.
In contrast, the CJEU accepted the UK’s mitigation by way of: (i) taking steps towards compliance both before the Commission’s legal action and during proceedings; (ii) the reduced effect of the infringement from 1 January 2021; and (iii) this being the UK’s first failure to comply with a CJEU judgment in this respect.
Ability to pay
The CJEU held (in line with previous case law) that a State’s GDP is the predominant factor in considering the ability to pay, and the need to set a penalty that is sufficiently dissuasive and proportionate.
The UK argued that Northern Ireland’s GDP (not that of the UK as a whole) was the appropriate reference figure for the entire infringement period. The CJEU held:
- it was irrelevant that the UK is no longer a Member State and that EU law applied only to Northern Ireland both from 1 January 2021 and at the date the CJEU examined the facts;
- the fact that the infringement related only to Northern Ireland from 1 January 2021 had already been taken into account in deciding the seriousness of the infringement and could not be factored in once again;
- ultimately, it is the UK (not Northern Ireland) that is responsible for implementing and applying EU law in Northern Ireland under the terms of the Northern Ireland Protocol (and this remains the case under 2023’s Windsor Framework); and
- taking account of only Northern Ireland’s GDP in setting a penalty would not be sufficiently dissuasive and would fail to achieve the aim of preventing future infringements.
Accordingly, the CJEU fixed a penalty of EUR 32m.
A version of this article was first published by Lexis PSL on 5 October 2023.
