Header graphic for print
Focus on Regulation

Predicting the winds of change: business investment decisions and unexpected shifts in government policy

A change in government policy can sometimes have a profoundly adverse effect on businesses, particularly if that change is unexpected or sudden. Businesses, particularly those in highly regulated sectors, often rely on “clear assurances” from Government in relation to its policy objectives and areas of focus (and funding) as a basis for operating or investing in a particular sector.

There is a manifest public interest in Government, as the custodian of the public purse, being allowed to change its mind and not being bound to fulfil every policy statement it makes. However, reasonably relying on a clear statement from Government can, in certain circumstances, give rise to a legitimate expectation on the part of citizens and businesses that Government will stay true to its word.

So when is it safe for businesses to rely on statements of government policy when making investment decisions? Two recent judgments of the Court of Appeal, in the context of recent changes to the Government’s renewable energy policy and the subsequent impact on businesses in the renewable energy sector, should act as a warning for businesses whose operations may be exposed to unexpected shifts in Government policy.

Solar Century Holdings Ltd v Secretary of State for Energy and Climate Change [2016] EWCA Civ 117

In 2013, the Government proposed to replace its renewables obligation scheme (the “RO Scheme“), through which the Government provided financial support for large scale renewable electricity generation projects, with a new scheme based on contracts for difference. As part of this transition and to minimise the risk of disruption for developers, the Government’s proposal was to close the old RO Scheme to new capacity on 31 March 2017.

Following the Government’s announcement, there was a higher than expected rate of uptake of solar photovoltaics (“PV“) generation under the RO Scheme. Concerns that the higher uptake would cause the financial cap on government support for the RO Scheme to be exceeded led the Government to decide to close the RO Scheme two years earlier than planned, on 1 April 2015.  This decision was given effect by a renewables obligation closure order issued by the Secretary of State pursuant a statutory power granted under the Energy Act 2013.

The Government’s decision was challenged in the High Court by certain companies involved in the installation of so-called large-scale PV systems (also known as “solar farms”). The claim reached the Court of Appeal when the companies appealed against the High Court’s dismissal of their application for judicial review.

The solar farm companies argued that the decision was contrary to their legitimate expectation arising from the Government’s “clear and unequivocal representations” that the RO Scheme would not close before 2017.  As such, the companies argued that the statutory power to issue a renewables obligation closure order could only be exercised in accordance with the binding pre-legislative statements about the 2017 closure date.

The Court of Appeal concluded that there was no legitimate expectation that the RO Scheme would remain open until 2017. The Government’s statements were merely statements of policy: they did not say that there would be no circumstances in which the RO Scheme would be closed earlier, only that closure was planned for March 2017.

Even where an end date was given, the Court said that “there can be no immutable presumption on that ground alone that the policy will continue without change until that date, whatever changes in circumstances may arise“. The Court stated that this was because Government is “entitled to formulate and re-formulate policy when rational grounds exist for doing so, unless to do so would amount to an abuse of power by reason of the manner in which it has previously conducted itself“.

The companies argued that the operation of the RO Scheme was also subject to a clear proviso that the Government would keep its promises it had made in relation to maintaining support for existing investments until 2017.

The Court rejected the companies’ reliance on witness statements made in the course of proceedings as evidence of the Government’s intention because they “would not be available even to the best informed of readers“.  Instead, the Court focussed on what the Government had said publicly about maintaining support levels, in consultation and other policy documents.

The Court concluded that, while the companies were correct to say that ensuring a stable investment environment was an important aspect of the policy, this was not the only objective and that “it must have been apparent to all concerned that, if uptake of solar PV threatened [the financial cap], the Government might, and probably would, bring forward the closure date“.

Ultimately, given that the case concerned the apportionment of public funds to a range of deserving renewable energy technologies via the Government’s various financial schemes, the Court questioned the realism of the companies’ expectations, stating that there would inevitably be compromises involved and that “solar PV operators could not possibly entertain a secure expectation that their particular scheme would be protected at the expense of others“.

Infinis Energy Holdings Ltd v HM Treasury [2016] EWCA Civ 1036

In the July 2015 Budget, the Government announced its decision to remove an exemption from the Climate Change Levy, a tax on energy supplied to non-domestic consumers, for renewable-source electricity (the “RSE Exemption“). The removal of the RSE Exemption took effect from 1 August 2015, giving businesses only 24 days’ notice of the change in policy.

The Government’s decision was challenged by two renewable energy generating companies in September 2015. The RSE Exemption was an important source of income for renewable energy generators, so the companies argued that the Government’s decision gave them an unreasonably short notice period of the RES Exemption removal, which had been completely unexpected. They claimed that they had a legitimate expectation that any removal of the RSE Exemption was subject to a minimum two-year lead time.  They also claimed that, given the significant adverse impact of the removal of the RSE Exemption on renewable energy generators and that the policy was within the scope of EU law, the decision was also in breach of the EU law principle of proportionality and contrary to rights under the Article 1 of Protocol 1 of the European Convention of Human Rights (the “ECHR“) to the peaceful enjoyment of their possessions (“A1P1“).

The High Court dismissed the case and Infinis appealed to the Court of Appeal.

Legitimate expectation

Counsel for Infinis argued that the very existence of the relevant legislation providing for the RSE Exemption, especially as it had been maintained for many years, had led businesses to expect that reasonable notice would be given before the RSE Exemption was removed. They argued that the Government must have expected renewable energy generators to plan their business and make investment decisions based on the expectation that the RSE Exemption would continue and that this was enough to bring the claim within the scope of the principles of legal certainty and foreseeability. However, at the outset, the Court of Appeal instead agreed with the Government that there was a clear and consistent line of EU law that, in order to give rise to a legitimate expectation enforceable in the courts in the context of a change to the national tax code, the public authority must give a “precise, unconditional and unambiguous assurance, whether by words or conduct, of an expectation as to how it will behave in future“. This approach also applied to the related EU law principles of legal certainty and foreseeability, as the various principles must be interpreted in a coherent manner.

Infinis also tried to argue that the applicable test differed depending on whether the decision concerned an administrative act or a change in a rule of law. The Court rejected this distinction – a uniform set of rules applied regardless of whether acts fell into the administrative sphere or the legislative sphere.

In the present case, the Court of Appeal held that the Government had made no promise or assurance that the RSE Exemption would be maintained indefinitely, nor that it would be subject a period of notice before being removed. In the absence of a clear, precise and unconditional assurance given to the contrary, it was always inherently foreseeable that there was a possibility of immediate withdrawal, not least because the Government and Parliament had a general discretion to alter the tax regime as they saw fit. The Court went further, stating that:

In the context of establishing and changing the rules of a national tax regime, a prudent and circumspect economic operator would appreciate that the tax authorities and national legislature might change the tax code without notice. They are entitled to do so, as it is their function in a democratic society to manage the public finances….

Proportionality and A1P1

It was common ground that, even though the precise approach of the Court to the issue of proportionality may not be identical in the context of EU law and the ECHR, for present purposes if Infinis failed under one it could not succeed under the other.

Infinis argued that the Government’s decision to remove the RSE Exemption detrimentally affected the commercial viability of Infinis’ contracts to supply electricity to customers and was therefore an interference with its protected interests under Article 17 of the EU Charter of Fundamental Rights and its right to peaceful enjoyment of its possessions under A1P1. As such, Infinis argued, any interference must be proportionate means to achieving a legitimate aim.  Infinis did not dispute that the Government could lawfully decide to remove the RSE Exemption, but challenged the method for implementing that decision, because it was done with almost no notice.

The Court quickly established that the decision to remove the RSE Exemption was pursuant to a legitimate objective, namely the appropriate apportionment of public revenue. It then went on to consider the implementation of the decision.

According to Infinis, the Government should have given a minimum of one fiscal year’s notice before withdrawing the RSE Exemption, which amounted to a delay of 20 months. However, as the Court stated, any delay in withdrawal of the RSE Exemption would have represented loss of revenue that the Government and Parliament considered was urgently required. Therefore, in the Court of Appeal’s view, Infinis was inviting the Court, by invocation of the principle of proportionality, to alter a fiscal measure by Parliament, which required weighing up a number of macro-economic considerations that it was primarily for the Government and Parliament to undertake.

The Court concluded that it “should be very slow to second guess the decision of Parliament in relation to such an assessment“, as there was “no simple, objective standard which the court can apply” to conclude that the withdrawal of the RSE Exemption was disproportionate to achieve the multiple policy objectives that Parliament and the Government sought to promote by doing so. The Court went on to note a number of other factors that suggested the withdrawal was proportionate, including that:

(a) the withdrawal left a large and valuable series of other financial incentives for the production of renewable energy;

(b) although the withdrawal was practically immediate, it was only prospective, in the sense that exemption certificates (which were capable of being sold commercially by renewable energy generators under the scheme) already generated remained valid after the RSE Exemption was withdrawn; and

(c) the evidence suggested that the impact to renewable energy generators had been specifically considered and that it was decided that it was outweighed by other considerations.

In the end, the Court took a dim view of the fact that Infinis’ evidence suggested that the loss of income that resulted from the withdrawal, although substantial, could not, and would not, have been avoided if Infinis had been given notice in the way it claimed was necessary. In light of this, the Court concluded that there was no real detrimental reliance by Infinis on any expectation that there would be a notice period of around two years before withdrawal of the RSE Exemption.

In other words, Infinis was in fact challenging the decision to withdraw the RSE Exemption itself, which had resulted in a sudden, substantial and unexpected increase in its tax liability, not the method of implementation of that decision. The Court was very clear that challenging such a decision on proportionality grounds before the courts was effectively a “no-hoper”, because it amounted to a challenge to the merits of the policy itself, in respect of which Parliament, as the democratically elected legislative body for the UK, had a wide margin of discretion:

In the context of proportionality, and in the absence of any legitimate expectation, however, a reduced income of this kind has little, if any, weight when set against the public interest as judged by Parliament. A mere change of income for individuals or companies because of a change in tax regime cannot be regarded as something which indicates disproportionality in a tax measure adopted by a state.