Brexit: retained EU tax law
The effect of the UK’s exit from the EU on 31 January 2020 has been tempered by the transition period, during which the UK has been treated as an EU member state for many purposes. Deal or no deal, the transition period will expire on 31 December 2020 and, from 1 January 2021, the UK will cease to be subject to the rules and regulations of the EU.
Irrespective of whether or not a free trade agreement is reached between the UK and the EU, the UK will continue to be influenced by EU law for some considerable time. This is as true in the realm of tax as in other areas of law.
The legislative framework surrounding Brexit
With the exception of the Internal Market Bill, which is currently the source of so much political debate, there are three main UK statutes governing the UK’s withdrawal from the EU:
- the European Union (Withdrawal) Act 2018 (EUWA), which contains the UK domestic law provisions governing the UK’s departure from the EU;
- the Taxation (Cross-border Trade) Act 2018 (TCBTA), which sets out the post-Brexit regime for customs duties and VAT; and
- the European Union (Withdrawal Agreement) Act 2020 (EUWAA), which implements the Withdrawal Agreement between the UK and the EU into UK law and makes changes to the EUWA.
The first of these, the EUWA, repeals the European Communities Act 1972 (ECA 1972), the statute which gave effect to EU law in the UK. Although affectionately known as "The Great Repeal Bill", at the same time, the EUWA incorporates a snapshot of EU-derived law into UK law and then provides powers for existing UK law to be amended to accommodate Brexit.
In the form in which the EUWA was originally enacted, the repeal of the ECA 1972 was due to take place on "exit day" (which eventually became 31 January 2020) and the snapshot of EU-derived law was due to be taken ediately before "exit day". The Withdrawal Agreement provided for a transition period until 31 December 2020 during which the UK continues to apply EU law. The EUWA was not drafted to accommodate the transition period, so the EUWAA makes amendments to the EUWA to deal with this.
The mechanism by which the EUWA (as amended by the EUWAA) gives effect to the Withdrawal Agreement is complex. For present purposes – and ignoring related provisions dealing with the EEA and Swiss agreements – it is sufficient to note that the revised provisions do not simply defer the repeal of ECA 1972 to 31 December 2020. The ECA 1972 is still repealed on "exit day", but changes are made to the EUWA to preserve certain parts of the ECA 1972, and secondary legislation made under it, until the end of the transition period. The snapshot of EU-derived law is, however, deferred until 31 December 2020. That date is now referred to in the legislation as "implementation period (IP) completion day". I have used the same terminology in this article.
Retained EU law
The snapshot of EU-derived law, which is taken on IP completion day, is referred to as "retained EU law".
The definition of retained EU law appears in EUWA s 6(7). It does not include all EU-derived law. It has three main components:
- "EU derived domestic legislation";
- "direct EU legislation"; and
- a broad category of "rights, powers, liabilities, obligations, restrictions, remedies or procedures" which are recognised and available in UK law before IP completion day, in each case so far as they continue to be or form part of domestic law by virtue of the relevant provisions of the EUWA. These are supplemented by a body of law derived from retained case law and general principles of EU law which I describe below.
EU derived domestic legislation
There is no prescribed list of EU derived domestic legislation. Instead EU derived domestic legislation is defined in EUWA s 1B(7) in rather general terms to include, in summary, any secondary legislation that is made under ECA 1972 s 2(2) and any other domestic legislation which implements an EU obligation, which arose before IP completion day.
Subject to certain exceptions, EU derived domestic legislation continues to have effect after IP completion day in the same way as it did immediately before IP completion day (EUWA s 2). The reason for the provision is obvious. Without it, much secondary legislation made under ECA 1972 would fall away with the repeal of that legislation.
The definition of EU derived domestic legislation can also encompass primary legislation, which is made or operates to implement EU obligations. In the tax context, this would include legislation, which was specifically introduced to implement an EU directive, such as VATA 1994, and the provisions of TCGA 1992, which implement some of the requirements of the EU Mergers Directive (2009/133). It would also extend to other provisions, which have been regarded as meeting the UK’s obligations under certain EU directives, but which were part of UK law before the relevant directive was issued. This would include, by way of example, the rollover provisions in TCGA 1992 s 135 (which met the requirements of part of the EU Mergers Directive) and parts of the hybrid rules in Part 6A of the Taxation (International and Other Provisions) Act 2010 (TIOPA) and the controlled foreign companies regime in TIOPA 2010 Part 9A (which fulfil the UK’s obligations under the EU Anti-Tax Avoidance Directives 2016/114 and 2017/952).
Is this primary legislation also "retained EU law"? The intention would appear to be that it is (see, for example, the discussion in the explanatory notes at paragraph 77). That view would fit with the scheme of the Act. However, the wording of the statute is less clear. The definition (in EUWA s 6(7)) refers to EU derived law which "continues to be, or forms part of," UK domestic law "by virtue of" one of the relevant provisions of the EUWA (in this case, s 2). And, of course, primary legislation will not fall away with the repeal of the ECA 1972 and does not require the saving provision in EUWA s 2 to continue to be part of domestic law. Does it matter? Well perhaps – to the extent that the application of the interpretation provisions (see below) or the scope of the amending powers in the EUWA is in point.
Direct EU legislation
Direct EU legislation is defined in EUWA s 3(2). It includes any EU regulation, EU decision or EU tertiary legislation that is in force and applies immediately before IP completion day. Under EUWA s 3(1), direct EU legislation is treated as forming part of domestic law immediately after IP completion day.
In addition to the area of customs duties, there are tax-related examples in this category. They include the EU VAT regulations governing administrative cooperation in the context of VAT and the Implementing VAT Regulation (282/2011/EU), which seeks to ensure the consistent application of VAT rules across EU member states. In the VAT context, however, the TCBTA provides that any regulation relating to VAT which forms part of the domestic law of the UK by virtue of EUWA s 3 ceases to have effect (TCBTA s 42). This is subject to a limited exception for the Implementing VAT Regulation in cases where the Principal VAT Directive (PVD) remains relevant for determining the meaning and effect of the law relating to VAT. In such cases, the PVD is to be read in the light of the provisions of the Implementing VAT Regulation (but ignoring any of its provisions, which are excluded by Treasury regulation).
Directly effective rights etc.
The third category of retained EU law comprises "rights, powers, liabilities, obligations, restrictions, remedies or procedures" which are recognized and available in UK law by virtue of ECA 1972 s 2(1) before IP completion day. These rights etc. continue to be recognized and available in UK domestic law after IP completion day by virtue of EUWA s 4(1).
The purpose of this category is to incorporate into UK domestic law rights under EU treaties and EU directives which have direct effect in domestic law before IP completion day, i.e. those rights which are sufficiently clear, precise and unconditional to confer rights directly upon citizens without the need for implementing measures.
In the tax context, perhaps the most important EU treaty rights are those under article 18 (prohibition of discrimination on the grounds of nationality), articles 49 (freedom of establishment), articles 56-62 (freedom of movement of goods and services) and articles 63–66 (freedom of movement of capital) of the Treaty on the Functioning of the European Union. Many of these rights will, however, be immediately repealed by domestic legislation. For example, the TCBTA will by implication necessarily restrict the rights of EU nationals to freedom of movement of goods to and from the UK; and the Freedom of Establishment and Free Movement of Services (EU Exit) Regulations, SI 2019/1401, will restrict the rights of EU nationals to freedom of establishment, free movement of services and freedom from discrimination on the grounds of nationality. The right to freedom of movement of capital, thus far, remains untouched.
As regards rights under EU directives, this category is limited by a further provision (EUWA s 4(2)), which specifically excludes any rights, which arise under an EU directive, and which are not "of a kind" recognised by the CJEU or any court or tribunal in the UK in a case decided before IP completion day. The explanatory notes (at paragraph 98) suggest that the reference to rights "of a kind" is not generic; the same specific rights must have been recognized in another case. So this is a significant restriction. For the most part, it will mean that directly effective provisions of directives will only be incorporated into domestic law if they have been expressly recognised as such by the CJEU or by a UK court or tribunal before IP completion day. There is a limited extension to this category in the transitional rules (Sch 8 para 38) for proceedings that were begun on or before IP completion day.
There are many open questions here. The concept of retained EU (tax) law is likely to trouble our courts and tribunals for some time to come.
Exclusions from EU retained law
The EUWA also limits the application of other parts of EU derived law on or after IP completion day.
The supremacy of EU law
Section 5(1) EUWA expressly provides that the principle of the supremacy of EU law over domestic law does not apply to any enactment or rule of law passed or made on or after IP completion day. The principle, however, survives in relation to the interpretation of pre-IP completion day law. So retained EU law will take precedence over pre-IP completion day domestic legislation which is inconsistent with it. Furthermore, the principle of supremacy continues to apply to pre-IP completion day law that is modified after IP completion day "if the application of the principle is consistent with the modification" (EUWA s 5(3)).
The Charter of Fundamental Rights
The EUWA expressly excludes the Charter of Fundamental Rights from becoming part of UK domestic law after IP completion day (s 5(4)), although rights that are reflected in other parts of retained EU law will be unaffected by this exclusion.
The CJEU (then ECJ) decisions in Francovich and Bonifaci v Italy (Cases C-6/90 and C-9/90) established the principles on which an EU member state may, in appropriate cases, be liable to compensate individuals for a failure to implement EU law or a breach of EU law. Those principles have been important in tax cases such as the Thin Cap and FII litigation (Test Claimants in the Thin Cap Group Litigation v IRC (Case C-524/04), and Test Claimants in the FII Group Litigation v IRC (Case C-446/04)).
The EUWA excludes the right to claim damages in accordance with the rule in Francovich (EUWA Sch 1 para 4). However, there is an exception for proceedings relating to matters that occurred before IP completion day, which are begun within two years of IP completion day (EUWA Sch 8 para 39(7)).
Interpretation of EU retained law
If you have established that you are looking at a piece of EU retained law, how should you interpret it?
References to the CJEU will not be permitted after IP completion day. So the interpretation of this body of law will be in the hands of UK courts and tribunals.
EUWA s 6(3) provides that retained EU law, which has not been modified on or after IP completion day, is to be interpreted according to "retained case law" and "retained general principles of EU law". Where any EU retained law has been modified after IP completion day, it can be interpreted in accordance with retained case law and retained general principles of EU law provided that to do so is "consistent with the intention of the modifications" (EUWA s 6(6)).
No matter how willing courts and tribunals may be to have regard to pre-or post-Brexit case law of the CJEU, there is considerable scope within these provisions for the UK interpretation of matters of EU retained law to diverge from the accepted EU interpretation in years to come.
Retained case law
Retained case law includes (i) retained domestic case law, that is, decisions of UK courts and tribunals and (ii) retained EU case law, that is, decisions of the CJEU (and ECJ), in each case, in so far as they relate to retained EU law and as they have effect immediately before IP completion day.
The EUWA therefore creates a body of case law as at IP completion day, which is to be applied in interpreting retained EU law. The Act then goes on to provide how this body of law will develop over time.
The usual rules of precedent will apply to retained domestic case law.
As regards retained EU case law, a UK court or tribunal will not be bound by a decision of the CJEU made on or after IP completion day, although it "may have regard to" such decisions so far as it is relevant to the matter before the court or tribunal.
Pre-IP completion day CJEU decisions, which form part of retained law, will not bind the Supreme Court or, in some cases, the High Court of Justiciary in Scotland, which will be able to depart from them applying the same test as they would normally apply when departing from their own previous decisions.
The EUWA also contains powers for a minister by regulation to provide that any other court or tribunal should be able to depart from retained EU case law. The government has been consulting on the extent to which these powers should be used to extend the ability of UK courts and tribunals to depart from pre-IP completion day CJEU decisions.
No matter how willing courts and tribunals may be to have regard to pre- or post-Brexit case law of the CJEU, there is therefore considerable scope within these provisions for the UK interpretation of matters of EU retained law to diverge from the accepted EU interpretation in years to come.
Retained general principles of EU law
The EUWA defines "retained general principles of EU law" as the general principles of EU law, as they have effect in EU law immediately before IP completion day, so far as they relate to EU retained law (EUWA s 6(7)). The definition applies those principles as modified by the EUWA and domestic law from time to time. However, the EUWA also provides that no general principle of EU law can be part of UK domestic law after IP completion day, if it was not already recognized by the CJEU in a case decided before that day (EUWA Sch 1 para 2).
The general principles of EU law to which the definition refers are the fundamental legal principles that govern the interpretation of EU laws. The explanatory notes refer to proportionality, non-retroactivity, fundamental rights, equivalence, and effectiveness as examples of general principles (at paragraph 59).
The retained general principles of EU law can, however, only be used for the purposes of the interpretation of retained EU law after IP completion day. They will not, on their own, give rise to a right of action in domestic law based on the failure of legislation to comply with general principles of EU law and courts and tribunals will not be able to quash any law or decide that any conduct is unlawful on the basis that it is incompatible with the general principles (EUWA Sch 1 para 3).
There are open questions as to where these provisions leave some of the key principles, which underpin retained EU tax law.
For example, the principle of fiscal neutrality, which is so central to the VAT system. Is it a general principle of EU law? Or is it just a principle that underlies the PVD? In any event, what is the scope of a principle, which concerns the maintenance of a harmonized VAT system across the EU, within a post-Brexit domestic VAT system? What role does the principle of abuse of rights have in the context of domestic taxation of transactions, which do not involve the exercise of EU rights? In the context of VAT, the TCBTA contains a specific provision, s 42(4), which refers to the principle of abuse of rights (and in particular to the principles outlined in the Halifax (Case C-255/02) and Kittel (Case C-439/04) cases). However, that provision simply cross-refers to preservation of the principle in accordance with the EUWA and so arguably does not affect the scope of its future relevance.
There are many open questions here. The concept of retained EU (tax) law is likely to trouble our courts and tribunals for some time to come.
This article was first published in Tax Journal.