In this article, we consider how Brexit may impact on the cross-border exchange of information between HM Revenue & Customs and other European tax authorities. We also outline some of the key issues of relevance to taxpayers with pending domestic claims against HMRC which are premised (in part or in whole) on a breach of EU law.
1. Cross-border disputes
Will Brexit impact on the co-operation between HMRC and European tax authorities in cross-border disputes?
A notable feature of the current tax environment is the increasing focus on cross-border co-operation between international tax authorities and the trend towards a global approach of tackling tax evasion and avoidance. This builds on the established history of cross-border exchange of information and mutual assistance in the enforcement of overseas tax debts which exists between EU member states and which is facilitated by certain EU directives, including:
- the Directive concerning Mutual Assistance for the Recovery of Claims Relating to Taxes, Duties and other Debts (2010/24/EU) (“MARD”). This is a multi-lateral treaty which allows a tax authority in one EU jurisdiction to request the assistance of a tax authority in another EU jurisdiction (a “foreign tax authority”) in recovering a tax or duty debt where the defaulting taxpayer is living in the jurisdiction of the foreign tax authority or has assets in that jurisdiction;
- the Directive for Administrative Co-operation in Taxation matters (2011/16/EU) (“ACD”). This is a multi-lateral treaty which imposes an obligation on a tax authority in one EU jurisdiction to provide information in relation to income tax or corporation tax to a foreign tax authority in certain circumstances; and
- Council Regulation (EU) No 904/2010 of 7 October 2010 on administrative cooperation and combating fraud in the field of value added tax (the “VAT Cooperation Regulation”). This regulation aims to combat VAT fraud by governing EU member states’ collection and storage of information and the sharing of that information between member states. The VAT Cooperation Regulation also facilitates the sharing of information through the establishment of administrative systems and mechanisms.
Exchange of information provisions are also often included in double taxation treaties (“DTTs”) and are also dealt with in tax information exchange agreements (“TIEAs”).
Where a taxpayer is involved in a cross-border dispute, the relevant overseas tax authority will frequently invoke the provisions of MARD or ACD in order to engage the assistance of HMRC in recovering and enforcing an overseas tax debt. Likewise, HMRC may do the same in relation to a UK tax dispute with an overseas taxpayer. The question therefore arises whether post- Brexit, the ability of HMRC to call upon the mutual assistance of a tax authority in an EU member state would be restricted. Although this is not certain, we consider this to be unlikely.
MARD has been directly transposed into UK law through primary domestic legislation which will remain in force after Brexit. It would of course be possible for the UK to cease participation in the MARD frameworks after Brexit, by legislating to remove the relevant domestic legislation, although this seems unlikely at present. ACD has been directly transposed into UK law through domestic secondary legislation which has effect by virtue of the European Communities Act 1972. This means that in principle such legislation would no longer have effect once the European Communities Act is repealed upon the UK leaving the EU, unless (as we would expect) there is some form of saving provision. As an EU regulation, the VAT Cooperation Regulation is directly applicable in UK law and, once the European Communities Act is repealed, it will also cease to apply in the UK unless there is a saving provision. It is worth noting, however, that once the UK has exited the EU, then European tax authorities would not be compelled to comply with any requests from HMRC under MARD and/or ACD (as transposed into the domestic legislation of the relevant overseas jurisdiction) in relation to the enforcement of UK tax debts overseas or the provision of information to HMRC.
In any event, notwithstanding MARD, ACD and the VAT Cooperation Regulation, the UK will continue to be subject to the terms of its DTTs and TIEAs after Brexit. It will also continue to be a member of the Organisation for Economic Co-operation and Development (“OECD”), and it is a signatory to the OECD’s multilateral Convention on Mutual Administrative Assistance in Tax Matters, which aims to promote cooperation between tax authorities to prevent tax evasion. As a result, following (and notwithstanding) Brexit, we anticipate that the UK will continue to want to cooperate with other European tax authorities in relation to the cross border exchange of information and enforcement of tax debts, provided that it receives reciprocal treatment from its counterpart European tax authorities in relation to enforcement of UK tax debts in overseas jurisdictions.
2. Domestic claims
A significant number of tax cases involve EU law issues, particularly in relation to VAT. In such cases, the UK courts may make a reference to the European Court of Justice (“ECJ”) to determine the relevant EU law issue. Several questions arise in relation to the role, jurisdiction, and status of decisions of the ECJ in the post-Brexit world, which we consider below.
What will be the role of the ECJ in the UK judicial system post-Brexit?
This will depend on whether the UK becomes a member of the European Economic Area (“EEA”), the European Free Trade Association (“EFTA”), or neither.
If the UK becomes a member of the EEA, it will be subject to the decisions of the EFTA court which is expected closely to follow the ECJ’s jurisprudence in relation to laws of EEA states which are equivalent to EU law.
Switzerland, the only purely EFTA state (being the only EFTA state which is not a member of the EEA), is not bound by the decisions of the ECJ or the EFTA court. Therefore, if the UK adopts the Swiss model, or if it does not become a member of the EEA/EFTA, the UK courts could conceivably diverge in their judicial interpretation of laws, even if they originated from the UK’s membership of the EU or were equivalent to EU laws.
Going forward, it is likely that ECJ judgments will be persuasive but not binding on the UK courts in relation to EU-derived legislation that is retained by the UK.
Where a taxpayer’s case includes a point of EU law which the UK court has referred to the ECJ, what will happen if Brexit occurs whilst the referral is pending?
This will depend on how the political negotiations proceed, and, again, whether the UK’s post-Brexit relationship will have close proximity with the EU, via membership of the EEA/EFTA.
We anticipate one of the more likely outcomes would be that the ECJ would decline to hear a referral which had been made from a UK court but not determined prior to the UK leaving the EU, or that the referral would be withdrawn. It is possible, although unlikely, that the ECJ would answer the question (whether or not the referral is explicitly withdrawn) in order to provide some precedent value for the remaining member states. In such circumstances, although the UK court would not strictly be obliged to pay any regard to the ECJ’s decision, we would expect it to follow the ECJ decision where EU law was the applicable law at the time that the facts giving rise to the claim occurred.
What will be the impact of Brexit on pending domestic claims (such as those stayed behind Littlewoods and ITC) where the cause of action arises from an EU decision?
Brexit is likely to have an impact in some form on pending domestic claims involving a point of EU law. Of particular note in this regard are a significant number of cases claiming restitution of VAT which was levied by the UK in breach of EU law, and compound interest on such overpayments. These cases have been stayed before the High Court pending the outcome of the cases of Investment Trust Companies v Commissioners for HM Revenue & Customs (“ITC”) and Littlewoods Retail Limited and others v the Commissioners for HM Revenue & Customs (“Littlewoods”), both of which involve matters of EU law.
The ITC case concerns claims for repayment of VAT which was levied by HMRC in breach of EU law on investment management fees charged by fund managers for services which they supplied to closed-end investment trusts. The litigation deals with the amounts that the trusts can properly claim as a refund directly from HMRC and the periods in respect of which those refunds are available, taking into account the funds’ rights to an effective remedy under EU law, and whether this right was satisfied under the relevant domestic legislation. The Supreme Court’s judgment is awaited, following the appeal from the decision of the Court of Appeal in February 2015.
The Littlewoods case deals with whether simple interest paid by HMRC to taxpayers in respect of VAT that was incorrectly charged in breach of EU law constitutes adequate compensation for the taxpayer under EU law, or whether compound interest is required to be paid in order for the taxpayer to be adequately compensated. Permission to appeal to the Supreme Court has been granted, and the case is listed for hearing before the Supreme Court in July 2017.
If the Supreme Court finds in favour of the taxpayer in the ITC and Littlewoods cases in accordance with EU principles, then absent Brexit, taxpayers whose claims are stayed pending these lead cases would ordinarily expect to resolve their outstanding claims directly with HMRC through negotiation (or, if necessary, through continuing their claims to judgment). However, following the UK’s vote to leave the European Union, there is a risk that such claims may not be settled with HMRC or proceed to judgment until after the UK has left the EU. This would leave open the possibility that Parliament introduces legislation which retrospectively removes taxpayers’ accrued rights under EU law, or that any legislation enacted when the UK leaves the EU could otherwise adversely impact taxpayers who are seeking to rely on rights conferred by EU law.
The UK should however continue to be bound by the European Convention of Human Rights (“ECHR”) once the UK leaves the EU, and introducing legislation which retrospectively interferes with taxpayers’ accrued rights may conflict with the UK’s responsibilities under the ECHR, notwithstanding general rule of law considerations.
What should taxpayers likely to be affected by these issues do next?
Given the current uncertainties over the UK’s future relationship with the EU, taxpayers with any disputes which include a cause of action under EU law should consider how best to accelerate the resolution of any pending or unresolved claims.
In particular, those taxpayers who have claims which are stayed behind either the ITC and/or Littlewoods cases may wish to accelerate the preparation of their claims, by taking steps now to compile all relevant information and evidence necessary to quantify their claim, prior to the release of the decision of the Supreme Court in each of these cases. Early preparation of the factual evidence should enable those taxpayers whose claims are stayed pending the outcome of ITC and/or Littlewoods (or other similar lead cases) to apply to lift their stays and particularise their claims as soon as possible once the Supreme Court judgments have been handed down, if those decisions are in favour of the claimants. This will strengthen their prospects of securing a favourable judgment prior to the UK ceasing to be a member state of the EU.