On March 29 the U.K. government gave its long-awaited notice, under article 50 of the EU Treaty, of the U.K.’s intention to withdraw from the EU. This triggered the commencement of a two-year period for negotiating the arrangements for the U.K.'s withdrawal. The two-year period can be extended by agreement of the parties, but in the absence of such an agreement, the U.K.’s departure from the EU will take effect at the end of that period, even if no agreement has been reached on the departure arrangements.
The outcome of the negotiations, which will begin in earnest after the U.K.’s June 8 general election, are fraught with uncertainty. But at least one thing is clear – when the U.K. leaves the EU, it will no longer be subject to the jurisdiction of the Court of Justice of the European Union (CJEU). As the government explained in its February 2 “White Paper” on Brexit:
“The Court of Justice of the European Union... is the EU’s ultimate arbiter on matters of EU law. As a supranational court, it aims to provide both consistent interpretation and enforcement of EU law across all 28 Member States and a clear process for dispute resolution when disagreements arise. The CJEU is amongst the most powerful of supranational courts due to the principles of primacy and direct effect in EU law. We will bring an end to the jurisdiction of the CJEU in the U.K.”
In the meantime, however, the U.K. remains subject to EU law, including article 267 of the EU Treaty – the provision that establishes the jurisdiction of the CJEU to give binding preliminary rulings on the interpretation of EU law. The CJEU gives preliminary rulings on referrals made to it by the court of a Member State on a question of EU law whose answer is not clear from the existing CJEU jurisprudence. If such a question is raised in a case before a domestic court whose decisions cannot be appealed under national law (which I’ll refer to as a “category 1 court”), then the domestic court must refer that question to the CJEU. If, however, such a question is raised before a lower domestic court (which I’ll refer to as a “category 2 court”), then that court has a discretion to make a referral to the CJEU if it considers that a decision on the question is necessary for it to give judgment.
The interaction between articles 50 and 267 puts the U.K. in the following position:
The fate of such referrals will need to be resolved in the negotiations between the U.K. and the EU. But there has been speculation that, in the interim, U.K. litigants might be tempted to seek urgent referrals to the CJEU in order to gain the benefit of a ruling from that court before the shutters come down. In Coal Staff Superannuation Scheme Trustees Ltd v HMRC  UKUT 137 (TCC), speculation has now become reality, but with disappointing results for the litigant.
The case concerns a claim by the trustee of a superannuation scheme, an entity exempt from U.K. tax, for repayment of some GBP8.8 million in withholding tax on “manufactured overseas dividends” under various stock lending transactions. As it was exempt from U.K. tax, the trustee paid no U.K. withholding or other tax on manufactured dividends if the latter related to a U.K. company. If, however, the manufactured dividends were subject to foreign withholding tax, the U.K. legislation then applicable precluded the trustee from claiming double tax relief because it had no U.K. income tax liability to be set against the tax credit. Accordingly, the trustee paid no U.K. tax on domestic manufactured dividends, but had no U.K. relief from foreign withholding tax (including withholding tax charged by other EU member states) on foreign manufactured dividends. The trustee challenged that rule in proceedings before the First-tier Tribunal (FTT), contending that it breached EU law on the free movement of capital. When the FTT rejected that argument, the trustee appealed to the Tax and Chancery Chamber of the Upper Tribunal (UT).
Before its appeal was heard, the trustee made an application to the UT for an immediate referral to the CJEU of questions of EU law which arose on the appeal. Given that its decisions can be appealed, the UT constitutes a category 2 court for the purposes of referral to the CJEU. It therefore has a discretionary power to refer questions to the CJEU, but only if, in the words of article 267, “it considers that a decision on the question is necessary to enable it to give judgment”. The trustee nevertheless argued that the U.K.’s decision to leave the EU had effectively made the UT, again in the words of article 267, “a tribunal of a Member State against whose decision there is no judicial remedy under national law”. In other words, the UT had to regard itself as a category 1 court, and was therefore compelled to make the reference.
This was said to follow from the likely timetable of the litigation. According to the trustee, it was unlikely that its appeal to the UT would be listed before October 2017 at the earliest. If the judgement then took some months to prepare, the UT would not be able to consider a referral to the CJEU until well into 2018. By that point, it would be very unlikely that a preliminary ruling could be obtained from the CJEU before the expiry of the two-year period under article 50. A delay in making a referral would therefore result in the trustee being deprived of its ability to seek the assistance of the CJEU in resolving its claim. This in turn would make it excessively difficult for the trustee to enforce its substantive rights under EU law. In those circumstances, the trustee argued, the UT should give a purposive construction to article 267, and consider itself bound, as a category 1 court, to make a reference to the CJEU.
The UT (Mrs Justice Rose) disagreed. In a decision released on April 26, the judge said that the trustee was inviting her to assume that the arrangements that the government would make for resolving disputes about EU law, pending at the time of the U.K.’s departure, would be so unsatisfactory that the UT should accelerate referrals to prevent that situation arising. She was not prepared to make that assumption. A solution to the problem would have to be found because, at the date of exit, “very many people” would probably be in the same position as the trustee. It “would not be right to pre-empt that by rushing a preliminary reference off the CJEU in the hope that the Court will give a ruling before the U.K. exit”.
Nor did a purposive approach to the interpretation of article 267 mean that the UT was now a final court which was obliged to make a referral to the CJEU. The interrelationship between the two limbs of article 267, and their application to the U.K. court system, had been established for many years. Even adopting a purposive approach, that interpretation could not be changed by service of the article 50 notice. Similarly, the triggering of article 50 did not, contrary to an alternative submission by the trustee, change the test applied by the UT, as a category 2 court, to determine whether to make a referral as a matter of discretion.
The trustee's application for a referral was therefore subject to the normal test for determining such an application before the UT – was the UT satisfied that it would be unable, with complete confidence, to resolve the issues of EU law that were necessary for deciding the appeal? Applying that test, it was not appropriate to make a reference to the CJEU at this stage. Accordingly, the application was dismissed.
This may not be the final word on fast-track referrals to the CJEU. The UT's judgment is itself appealable, and, in any event, a decision of one UT judge is not binding on any other UT judge. But, for the time being at least, the express route to Europe seems to be closed.
By Dr Craig Rose, Technical Editor, Global Tax Guide
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