Milsom Hotels Limited v The Environment Agency

The Energy Savings Opportunity Scheme Regulations 2014 (“the Regulations”) came into force on 17^th July 2014 and require all large undertakings to audit their energy use in four yearly cycles.

The Regulations place duties on responsible undertakings to carry out an ESOS assessment, which includes an energy audit (Regulation 20), and to notify the Environment Agency of their compliance in accordance with Regulation 29 no later than the compliance date. To do this, the undertaking concerned must submit a Notification of Compliance, and in this instance, the relevant compliance date was 5^th June 2024. This was subsequently extended to 6^th August 2024 by the Environment Agency and other regulators as a result of delays in introducing a new notification system.

The Appellant in these proceedings was identified by the Environment Agency as falling within the statutory criteria of a “relevant undertaking”. Regulation 15 defines a relevant undertaking as follows:

“15.

–(1) Subject to regulation 16, an undertaking is a “relevant undertaking” in relation to a compliance period if, on the qualification date for that compliance period, it is –

(a)

a large undertaking, or

…”

Schedule 1 of the Regulations defines a large undertaking as follows:

“Large undertakings, and small or medium undertakings

1.

In these Regulations–

(a)

A “large undertaking” means an undertaking which either–

(i)

employs at least 250 persons, or

(ii)

has an annual turnover in excess of £44 million and an annual balance sheet total in excess of £38 million, and

…”

It is not necessary to meet both criteria (i) and (ii), but based on the Appellant’s number of employees, the Environment Agency considered that it qualified as a large undertaking under Schedule 1, paragraph 1(a)(i) of the Regulations. The number of persons employed by an undertaking on the qualification date is the total number of persons employed by an undertaking in each of the months in the accounting period used to calculate the undertaking’s annual turnover and balance sheet, divided by the number of months in that period (Para. 10, Schedule 1). A person is deemed to be employed by an undertaking if they are an employee of the undertaking, an owner manager of the undertaking or a partner in the undertaking (Para.9, Schedule 1). Paragraph 11 of Schedule 1 of the Regulations sets out what is referred to as the ‘two-year rule’. This provides as follows:

“11.

Where, in any accounting period, an undertaking is a large undertaking (or a small or medium undertaking, as the case may be), it retains that status until it falls within the definition of a small or medium undertaking (or a large undertaking, as the case may be) for two consecutive accounting periods.”

The Qualification Date for the third compliance period is 31^st December 2022, and the relevant compliance period runs from 6^th December 2019 to 5^th December 2023. These dates are determined by Regulation 4.

The relevant accounts are those for the financial year ending on, or in the 12 months preceding, the qualification date (Paras. 5 and 6, Schedule 1), and where numbers of employees fluctuate, it is determined by the ‘two-year rule’ which requires two consecutive accounting periods for any status change of the undertaking (i.e. from large undertaking to small/medium, or vice versa). This process is explained in at section 1.6 of the Environment Agency’s Guidance ‘Comply with the Energy Savings Opportunity Scheme (ESOS): phase 3’, which was last updated on 29^th November 2023.

The relevant financial accounts for the Appellant record its number of employees as follows:

Applying the two-year rule, the Environment Agency determined that the Appellant met the criteria for a large undertaking, as “the Appellant exceeded the employee threshold on the qualification date, and whilst this was not the case in 2021, they did so for the previous two consecutive years”.

Regulation 38 provides that where the Environment Agency reasonably believes that a responsible undertaking has failed to comply with a requirement of the Regulations, it may serve an Enforcement Notice on that responsible undertaking. As the Appellant did not submit a Notification of Compliance by extended compliance date of 6^th August 2024, it served an Enforcement Notice on 29^th April 2025, requiring the Appellant to complete an energy assessment or provide information to explain why it does not qualify for the Scheme.

Regulation 48 provides that an appeal can be made on the grounds that the Enforcement notice was (a) based on an error of fact, (b) wrong in law, or (c) unreasonable.

A Notice of Appeal was submitted by the Appellant on 20^th May 2025. The reasons advanced for the appeal are summarised as follows:

In response to the appeal, the Environment Agency has made a number of submissions, which are summarised as follows:

The Appellant replied to the Environment Agency’s Response on 23^rd July 2025, reiterating a number of the reasons set out in the Notice of Appeal. I have read and considered this document, in addition to all of the material provided in the 477-page Hearing Bundle, but I do not repeat matters here, save for stating that the Appellant considers that it was not reasonable for the Appellant to know that it was caught by the criteria for ESOS 3, because its headcount had reduced to below 250 and had been so from April 2022.

Having considered these matters in some detail, it does not appear that the Appellant has advanced any arguments which support a contention that the Environment Agency’s service of an Enforcement notice was based on an error of fact or was otherwise wrong in law. It appears to me that the appeal is advanced on the basis that the Enforcement Notice was unreasonable.

It is accepted by the Appellant that it never submitted a Notification of Compliance to the Environment Agency by the extended deadline of 6^th August 2024. It argues that it did not know that it was deemed a ‘large undertaking’ within the meaning of the Regulations and it did not therefore consider that it was required to comply with the ESOS Scheme. In its Reply to the Respondent’s Response to the appeal, it submits that it only has a small admin/finance department, comprising of 3 to 4 employees, and that it therefore does not have the time to monitor guidelines on schemes that it no longer believe that it had to comply with. It is, however, not the responsibility of the Environment Agency to provide the Appellant with continual reminders of its obligations to comply with the applicable Regulations. That duty falls upon the Appellant alone, and although the Environment Agency may choose to send out reminders or provide Guidance to companies who may be caught by the ESOS Scheme, it is not sufficient, for the purposes of the Regulations, for an Appellant to simply state that it was unaware of a requirement to comply with the Scheme. It is incumbent upon any business to ensure that it complies with any legislation or Regulations which are applicable to it, and in this instance, the Regulations are clear.

Although the Appellant has explained that its staffing levels increased in 2022 as a consequence of the Covid-19 pandemic and the government-imposed requirements, it is nonetheless the case that, when applying the Regulations’ ‘two-year rule’, it qualified as a ‘large undertaking’ and was therefore obligated to submit a Notice of Compliance by the extended deadline of 6^th August 2024. Whilst the accounts for the year ending March 2021 showed that staffing levels had fallen below 250 employees (213), the increase in number to 288 the following year in 2022 means that paragraph 11 of Schedule 1 of the Regulations applies, and the Appellant’s status therefore remained as being a ‘large undertaking’ by reference to the March 2019 and 2020 accounts. It is not the case that the accounts prepared in March 2022 are to be disregarded in favour of the number of employees at the actual qualifying date of 31^st December 2022 or following the March 2022 accounts being produced. That is covered by paragraphs 5 and 6 of Schedule 1 of the Regulations where the following words are used “…recorded in those accounts for the financial year ending on, or in the 12 months preceding, the qualification date”. The fact that the Appellant’s accounts were and continue to be prepared in March each year is not something which is assists as to the question of unreasonableness.

Having considered all of the matters raised by both parties, I am satisfied that it was reasonable for the Environment Agency to serve an Enforcement Notice upon the Appellant as a result of the failure to submit a Notice of Compliance.

The appeal is dismissed.