On a morning where it suddenly appears that a different European exit – the abject display from England v Iceland – has taken over the headlines (here’s to the England team selflessly acting to unite the country) we consider briefly the impact of the so-called ‘Brexit’ on UK direct taxes. Please note that, as such, this does not consider any VAT complications.
The current position
It hardly needs stating that, until such a time the UK leaves the Union, EU law remains supreme in the UK.
Although EU law does not govern direct taxes, it does directly influence and has led to the revision of UK tax provisions. For instance, the overriding principle of the ‘Freedom of Movement of Capital’ (See the ‘Four Freedoms’ below) has impacted on anti-avoidance provisions such as the Transfer of Assets Abroad rules. These are rules preventing the shifting of assets overseas to avoid income taxes and were found to be discriminatory from an EU perspective. This ultimately resulted in a change in legislation to (almost) make them compatible with EU law.
Secondly, the UK is a signatory to the European Convention on Human Rights (“The Convention”). This has been incorporated in to UK law by the Human Rights Act 1998. There are two main rights under The Convention which are generally relevant for the purposes of tax. The first is Article 6 of The Convention which provides for the ‘right to a fair trial’. This is largely irrelevant for most general tax matters where it has been shown these fall outside of Article 6. However, where any tax penalties fall within its ‘criminal limb’ (for example a simple tax penalty of 50% or over) then the Article 6 right may be triggered.
The second element is Article 1 of the First Protocol (“A1P1”). This provides for an individual to have peaceful enjoyment of his possessions. This has been brought up in a number of avoidance cases such as the judicial review case of Rowe regarding Partner Payment Notices. However, in the context of perceived avoidance cases this argument has gained little success. The recent case of Fessal does show that A1P1 can be helpful for the taxpayer in some circumstances.
It really depends on the nature of the UK’s relationship with the EU going forward. What has been emanating from Brexit Towers following the weekend seems to be an aim to become part of the EEA (like Iceland – boo – Liechtenstein and Norway). Of course, we could also strike some other deal.
It would seem that any deal would result in the ECHR being ripped up (from the UK’s perspective, anyway) and perhaps replaced by a UK or British bill of rights. One would expect this to have some protection for a ‘right to a fair trial’ however it is clearly difficult to understand how this might apply to tax matters at this stage.
A new deal as a member of the EEA (doing a ‘Norway’)?
The current EEA agreement protects the four main freedoms under the EU treaties. These are:
- Freedom of movement of persons;
- Freedom of the right of establishment;
- Freedom of the right to provide services (there are special rules for financial services);
- Freedom of the movement of capital
Of course, the freedom of movement of persons could be a major stumbling block here. It seemed that ‘getting control of borders’ was a significant element of the successful Leave campaign.
However, already politicians are downplaying the extent to which this returned the result. Regardless, a large swathe of the population would feel somewhat betrayed if an EEA agreement was struck on the basis of the current freedom of the movement of persons. Could such agreement include a quota? Could it deny benefits?
Under an EEA deal, the other freedoms would still be present. This would, one would assume, mean that they continue to act as moderator in respect of UK anti-avoidance rules – for example the Transfer of Assets and s13 of the Taxation of Chargeable Gains Act 1992.
Of course, the UK could look at other alternatives, particularly where freedom of movement was the fly in the ointment.
Depending on the nature of these alternative arrangements then this may have a knock on effect as to whether the other freedoms apply and whether they will have any influence over UK direct taxation matters.