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The European Union (Withdrawal) Bill, published last week, is the most significant piece of constitutional legislation for decades. What are its implications for VAT practitioners?
The Bill has two central aims.
The first is achieved in short order by clause 1: repeal of the European Communities Act 1972 (“ECA”). That clause, to adopt the metaphor used in the Miller case [2017] UKSC 5, blocks the conduit by which EU law becomes part of domestic law.
The second, rather complex, aim is to convert EU law applicable in the UK the day before the UK leaves the EU into domestic law so that the substantive law remains, generally, unchanged on exit day.
In order to achieve that aim, the Bill:
One of the most controversial aspects of the Bill is clause 7, which would give Ministers very extensive powers to make secondary legislation to remedy “deficiencies” in EU law.
In the world of VAT, none of those provisions is of immediate relevance. The domestic legislation providing for VAT is independent of the ECA (the VAT Act 1994 (“VATA”) and subordinate legislation made under that Act and various Finance Acts). And EU VAT law is contained in the Principal VAT Directive (“PVD”), which is already transposed into UK law by VATA and subordinate legislation made under it.
But, as we all know, the legislative bones of VATA and domestic VAT Regulations are clothed in the flesh of EU principles, including general principles and the principle that that legislation is so far as possible to be construed in accordance with the PVD, and case-law of the Court of Justice of the EU (“ECJ”). So what is to happen to that flesh on exit day?
The answer is to be found in clauses 4 to 6, as well as Schedule 1. These are certain to be the subject of considerable litigation over the years following Brexit.
Clause 4(1) preserves all “rights, powers, liabilities, obligations, restrictions, remedies and procedures” that were imported into domestic law by section 2(1) of the ECA. According to §88 of the Explanatory Notes to the Bill, that clause preserves all directly effective rights created by the EU Treaties.
However, clause 4(2) provides for a qualification to that principle which is very important to VAT: it states that clause 4(1) “does not apply to any rights, powers, liabilities, obligations, restrictions, remedies or procedures so far as they … (b) arise under an EU directive”. That means that the principle of direct effect of the PVD is abolished as from exit day (a reading supported by §92 of the Explanatory Notes). From exit day, therefore, it will no longer be possible to base a tax claim on the PVD itself, inviting the court to disapply any inconsistent domestic legislation.
Instead, at best, the court will be invited to construe the domestic provision so as to be consistent with the PVD. Here, the relevant provision is clause 5. Clause 5(2) states that “the principle of supremacy of EU law” continues to apply after exit day “so far as relevant to the interpretation, disapplication or quashing of any enactment or rule of law passed or made before exit day”. According to §§96 and 97 of the Explanatory Notes, the effect of that provision is to retain the rule that any domestic law passed before exit day must continue to be interpreted, as far as possible, in the light of relevant directives. However, under clause 5(1), the principle of supremacy of EU law will not apply to any legislation made after exit day, which is to be construed entirely in accordance with domestic rules of construction and therefore without reference to the PVD.
What about ECJ case-law and general principles? There are four important points here.
First, any ECJ case-law handed down after exit day will not bind the UK courts, though they may have regard to such case law (clause 6(2)). This provision decides, as a number of senior judges requested that Parliament decide, the question of whether UK courts can look at post-Brexit ECJ case-law in order to assist them on the interpretation of domestic law passed before Brexit and in order to implement EU obligations.
Second, under clause 6(1)(b), no UK court will have power after exit day to make a reference to the ECJ (though that restriction will presumably depend on the success of the UK in maintaining the Prime Minister’s famous “red line” on the role of the ECJ).
Third, under clause 6(4), the Supreme Court is to have power to depart from case-law of the ECJ (applying the same approach as it applies in deciding whether to depart from its own case-law).
Finally, Schedule 1 to the Bill provides, in paragraph 3, that (1) “there [will be] no right of action in domestic law on or after exit day based on failure to comply with any of the general principles of EU law” and (2) that “no court or tribunal … may, on or after exit day, disapply or quash any enactment or other rule of law, or … quash any conduct or decide that it was unlawful, because it is incompatible with general principles of EU law.” Under that provision, therefore, UK courts will not be able to disapply provisions of pre-exit VAT legislation on the basis that they were contrary to general principles of EU law, such as the principles of equal treatment or of fiscal neutrality. The most that can be done will be to argue that such legislation needs to be interpreted, so far as possible, to be compatible with such general principles.
One effect of the approach taken by the Bill would appear to be that, where a post-Brexit claim is made in relation to a piece of pre-Brexit legislation that continued to have effect after Brexit, it will be possible to claim in relation to the pre-Brexit period that that legislation should be disapplied as contrary to the PVD or general principles of EU law, but that such a claim will not be possible in relation to the period after Brexit. In effect, therefore, the previously “dis-applied” domestic provision will be “re-applied” on Brexit day. That is a somewhat odd result.
What is certain is that there will be much work for advisers in helping clients through, and ultimately litigating, the numerous issues that will arise under this Bill. Whatever its effects elsewhere, in this area Brexit will prove good for business.