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By Ben Stupples
Oct. 5 — The U.K.'s pending departure from the European Union poses massive challenges not just to the government but to any U.K. business seeking to resolve a value-added tax dispute through the highest court in the 28-member bloc—the Court of Justice of the European Union (CJEU).
As most VAT cases referred to the CJEU last more than a year before they reach a final verdict, U.K. tax experts have questioned whether the U.K. courts will cease referring VAT cases to the CJEU while the government begins negotiating the U.K.’s departure from the EU from the end of March 2017.
“Our best guess is that in about six months from March 31 next year, there are going to be no further references from the U.K. courts to Europe,” said Daniel Lyons, a London-based indirect tax partner for Deloitte’s Tax Policy Group. “It’s quite clear that the jurisdiction of the CJEU will end when we leave the EU, and it’s quite clear politically that that’s what the U.K. government wants to happen.”
Prime Minister Theresa May announced Oct. 2 at the Conservative Party Conference that the U.K. government will formally begin the two-year process of leaving the EU by the end of March 2017, and the uncertainty surrounding how the CJEU will treat VAT disputes during the Brexit negotiations follows tax practitioners in June urging U.K. companies to push for urgent referrals to the CJEU (128 TMIN, 7/5/16).
Some VAT disputes have a better chance of succeeding in the CJEU than in U.K. courts, and the latest concerns on VAT cases referred to the CJEU will add further impetus to companies seeking urgent referrals to the court before the U.K. negotiates its exit from the EU. May announced Oct. 3 that the government will post official notification of Britain’s intention to leave the EU by the end of March; the process is expected to last two years.
Yet Andrew Scott, a London-based legal director at global law firm Pinsent Masons, said the CJEU won't look to prioritize the U.K. ahead of any other existing member within the trading bloc.
“All the member states can refer cases to the CJEU directly—the Spanish, the Germans, and French will continue to do that,” he said. “I doubt that they’re going to want to do the U.K. any favors.”
Graham Elliot, director of Bishop's Stortford, U.K.-based tax advisory firm City & Cambridge Consultancy, said U.K. courts should, in theory, continue to refer VAT cases to the CJEU from March 2017—but added that he expects a “dwindling” of case referrals as the U.K. nears its EU exit.
“The dwindling will be very marked, and there must become a point—it could be in a year’s time—where the European Court of Justice will start to effectively deselect any references from this country, and to try and keep them on the backburner,” he said. “A U.K. court will have to start asking itself, ‘Can’t I resolve this issue on my own without going to the European Court of Justice?’”
The U.K. currently implements its VAT laws based on the 28-member bloc’s VAT Directive, which sets the standard rate of VAT at 15 percent and requires U.K. courts and tribunals to apply VAT in accordance with the directive and EU case law (178 TMIN, 9/14/16).
The directive will no longer be considered binding for the U.K. at the point of exit from the EU.
The Supreme Court, meanwhile, the highest court in the U.K., will become from that point the final authority for U.K. VAT matters, taking over from the CJEU.
Tom Kivlehan, a London-based VAT and international tax partner at BDO, highlighted the possible legal costs to businesses following a VAT dispute from the U.K. courts to the CJEU, as well as the difficulty of the U.K. avoiding EU laws if it decides to create new legislation once it’s left the EU.
“You’ve got to have very, very deep pockets if you’re going all the way up to the CJEU,” he said. “It’s going to be difficult to unravel U.K. VAT laws from the EU, especially as we make distinctions between how non-EU and EU members should be treated. Swathes will have to be re-written.”
During her Oct. 2 speech, May referenced the U.K.’s sovereignty by stressing that it won't leave the EU only to return afterwards to the jurisdiction of the CJEU.
The government will remove the statute that binds the U.K. to EU law through a Great Repeal Bill included next year in the speech delivered annually by the Queen before the ceremonial opening of U.K. Parliament, she said.
Yet while Brexit presents U.K. businesses with a challenge on VAT disputes, the freedom that the British government will have to set its own tax rates once the U.K. is outside the EU may help to bolster business’ bottom lines if it re-installs VAT exemptions that the CJEU has slapped down.
In May 2016, the CJEU ruled against the VAT exemption of an outsourced payment and booking service used by London-based cinema operator Odeon & UCI Cinemas Group Ltd. The case was referred to the EU court following a 2014 decision from a first-tier tribunal in the U.K.
Julie Park, managing director of London-based VAT Consultancy, highlighted the way the U.K. could reverse these CJEU rulings as the U.K. government has a broader view on VAT exemptions than the EU.
Her Majesty’s Revenue and Customs has been “hamstrung” on VAT due to the EU’s directive, and the government now has a chance to take the stance it has always wanted, she said.
“But they could keep things the way they are, and keep the Treasury’s coffers topped up,” she added. “It certainly won’t be as simple as opening the floodgates and allowing a whole range of exemptions.”
“We’re definitely alerting clients to the fact HMRC will have more flexibility, but we’re trying to say ‘don’t get too excited,' as the government’s budgets are tight,” said Deloitte’s Lyons. “You can wave your magic wand and get rid of these things, but they all cost money,” he added on VAT exemptions.
A CJEU spokeswoman declined to comment, citing uncertainty on the U.K.’s Brexit negotiations.
“Until negotiations start and Article 50 is triggered, the court’s position is that it will be business as usual,” the spokeswoman said.
A spokesman for Her Majesty’s Treasury said the U.K. will have all of the rights, obligations and benefits of EU membership until the point that it leaves the bloc.
“Arrangements for how the UK will exit the EU will be subject to detailed negotiations, commencing once Article 50 is triggered,” the spokesman added.
A spokesman for HMRC declined to comment.
U.K. courts have referred 29 of a total of 356 cases sent to the CJEU since 2010, according to figures compiled by Deloitte. As of Jan. 1, 2016, the U.K. had the joint-fourth lowest standard VAT rate in the EU, standing above Austria, Slovakia and Bulgaria.
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A list of ongoing VAT appeals in the U.K. is at https://www.gov.uk/government/publications/vat-appeal-updates/vat-appeal-updates.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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