Retained EU Law Act – welcome reprieve for stamp duty but uncertainty for VAT
As noted in our broader article on the Act, it has not been without controversy, and although its final form is a shadow of its former self, it nevertheless makes some important changes that may have some unintended consequences in the field of tax.
One of the more curious aspects of the Act was that, without further corrective action by the Government, it was going to bring back a domestic tax charge that had been broadly eliminated by EU law.
Under UK law (section 93 FA 1986) the 1.5% stamp duty reserve tax charge on issues of UK shares to depositary receipt issuers and clearance services has in practice not applied following a series of decisions handed down by the CJEU which established that the UK tax was contrary to the Capital Duties Directive (a Directive that prohibits EU Member States from imposing tax on the issue of shares and securities). The charge has remained in UK legislation, but only applies in a narrow set of circumstances where the issue of shares are not integral to the raising of capital for the company.
In a welcome but surprise move, on 14 September 2023 the Government announced that it intends to legislate to keep the current regime i.e. not impose a 1.5% charge to Stamp Duty or Stamp Duty Reserve Tax on issues or transfers of securities into depository receipt systems and clearances services made in the course of capital-raising arrangements. This will alleviate the concern that the revival of the 1.5% charge was going to promote the use of non-UK incorporated UK resident holding companies for UK based groups that are listed abroad.
While VAT was governed by the European VAT Directive prior to the UK’s withdrawal from the EU, the tax was almost entirely implemented in the UK by primary legislation (currently, VATA 1994) and secondary legislation authorised under VATA 1994. VATA 1994 is “EU derived domestic legislation” under the European Union (Withdrawal) Act 2018. This means that VATA 1994 is currently interpreted in accordance with:
- retained domestic and EU case law; and
- retained general principles of EU law.
This means taxpayers have continued to rely on directly effective rights deriving from the European VAT Directive, provided that those rights are of a kind recognised by retained case law.
From 1 January 2024 this will no longer be the case as the law currently stands. General principles of EU law will largely cease to apply in the UK and taxpayers will no longer be able to rely on preserved directly effective rights. It appears that the UK courts will still be able to use retained domestic and EU case law when interpreting VAT legislation but will have an increased ability to depart from retained EU case law. Retained CJEU case law will continue to apply in relation to VATA where it “relates to” VATA but will no longer be retained EU case law solely because it relates to a general principle of EU law (including the VAT Directive). The Act further provides that no general principle of EU law will be part of domestic law after 2023 and the principle of supremacy of EU law will also be abolished.
How then does one interpret the VAT legislation from 1 January 2024? The difficulties can be shown by considering the cost sharing exemption. Broadly speaking, in UK law the cost sharing exemption allows costs shared between groups of persons carrying on any VAT-exempt or non-business activity to be exempt from VAT. Pre-Brexit CJEU case law limited the cost sharing exemption to groups of persons making supplies covered by the social purpose exemptions under Article 132 of the VAT Directive (rather than the financial services exemptions under Article 135). The UK’s domestic implementation of the legislation has no such limitations. It was perhaps arguable whether this case law precluded UK taxpayers from relying on the domestic legislation prior to Brexit, but the position is now even more unclear because:
- retained EU case law will no longer have the effect of applying general principles of the VAT Directive; and
- the principle of supremacy will longer apply.
In summary, these changes introduce significant uncertainty for taxpayers currently relying on retained case law decided by reference to the general principles of the European VAT legislation or directly effective rights arising from the European VAT Directive.