This article sets out the legal position which would arise (assuming the current legislative arrangements re-main in place) in the event of a no-deal Brexit.
IMPLICATIONS OF A NO-DEAL BREXIT
The European Union Referendum Act 2015 was given Royal Assent on 17 December 2015. It announced that a referendum was to be held by 31 December 2017 at the latest, posing the question: 'Should the United Kingdom remain a member of the European Union or leave the European Union?'
The referendum took place on 23 June 2016, with 51.9% voting leave, 48.1% voting remain. Following the resignation of the Prime Minister, David Cameron, a leadership contest was held, as a result of which Teresa May became Prime Minister. She resigned on 7 June 2019 after a prolonged and ultimately unsuccessful attempt to get a Withdrawal Agreement, which had been agreed with EU member states, through Parliament. Following a leadership contest, Boris Johnson was elected Prime Minister. He has pledged that Brexit will take place on 31 October 2019.
The European Union (Notification of Withdrawal) Act 2017 received Royal Assent on 16 March 2017. The Act gave the Prime Minister the authority to invoke Article 50 of the Treaty on European Union1. Article 50 was invoked on 29 March 2017, with the result that the UK was due to leave the EU on 29 March 2019. This meant that there was a two-year period during which the EU and the UK might reach an agreement on their future relationship. The two-year period was subject to extension by mutual agreement, and in fact it was extended twice; as a result, the current date on which the UK is due to leave the EU ('exit day') is 31 October 2019.
Effect of Brexit on EU legislation applying in the UK
The UK joined the European Economic Community on 1 January 1973. This required the UK to give effect to EU law, which it achieved via the European Communities Act 1972 ('ECA'), which provides (section 2):
'All such rights, powers, liabilities, obligations and restrictions from time to time created or arising by or under the Treaties, and all such remedies and procedures from time to time provided for by or under the Treaties, as in accordance with the Treaties are without further enactment to be given legal effect or used in the United Kingdom shall be recognised and available in law, and be enforced, allowed and followed accordingly…'
Thus from the date on which UK joined the EEC (now the EU), UK legislation in many areas has been modified, or in some cases replaced, by European legislation. The level of convergence increased substantially following the completion of the Single Market in 1993.
It follows that the departure of the UK from the EU requires the repeal of ECA 1972. This is achieved by the European Union (Withdrawal) Act 2018, s 1 ('EU(W)A'), which states, explicitly and succinctly: 'The European Communities Act is repealed on Exit Day.'
The effect of EU(W)A 2018, s 1 in isolation would be to disapply directly effective2 EU law, and any legislation made under ECA 1972, s 2. In terms of VAT, this would mean the disapplication of any EU regulations in respect of VAT, and any EU customs regulations which have effect in relation to VAT by virtue of VATA 1994, s 16. EU VAT regulations are generally limited to administrative matters such as administrative cooperation and anti-fraud arrangements, although Regulation EU (No ) 282/2011 sets out measures directly impinging on the operation of VAT by (inter alia) clarifying the meaning of certain expressions, the place of supply in particular cases, and the status, capacity and location of the customer in relation to Directive 2006/112/EC. EU Customs legislation, on the other hand, largely takes the form of regulations, notably the Union Customs Code (Regulation (EU) No 952/2013) and its implementing regulations (Regulation (EU) No 2015/2446 and Regulation (EU) No 2015/2447). These regulations have direct effect in the UK, ie there is no requirement for domestic legislation to implement them.
The simple repeal of ECA without any modification would leave significant gaps in UK domestic legislation3. Consequently, EU(W)A 2018, ss 2-4 make provision for the retention of EU law as it existed immediately before exit day. Such 'retained EU law' falls into three categories:
- (s 2) EU-derived domestic legislation, ie UK legislation which was enacted to give effect to EU legislation. This would appear to include:
– VATA 1994, since it (or its predecessors) was enacted to implement EU legisla-tion4, as required by ECA 1972, s 2(2), and
– secondary legislation made under VATA 1994, such as the Value Added Tax Gen-eral Regulations (SI 1995/2518).
Thus EU-derived domestic legislation will continue in force from after exit day, except in one regard. With effect from exit day, there will no longer be a requirement for EU-derived domestic legislation to be subject to the Marleasing principle, ie that do-mestic legislation should, as far as possible, be interpreted in a manner which was compatible with the EU legislation from which it was derived. Thus, after exit day, it will be possible for EU-derived legislation to be amended or modified in a manner which is incompatible with EU law.
- (s 3) Direct EU legislation, ie EU legislation which has direct effect (see above) and therefore is not re-legislated for in the UK. Since such legislation is not the result of the UK legislative process, it is regarded as neither primary nor secondary legislation; nevertheless, it forms part of domestic law and is subject to modification if and when required.
- (s 4) Rights under ECA 1972, s 2(1), ie (inter alia) certain provisions of the EU treaties (including Articles 38 and 30 – customs arrangements), and decisions of the Court of Justice of the European Union ('CJEU'). EU(W)A 2018, s 6 provides that domestic courts may not refer cases to the CJEU after exit day. Decisions of the CJEU prior to exit day will be binding on courts other than the Supreme Court (and the High Court of Justiciary); CJEU decisions on or after exit day will not be binding on domestic courts but may nevertheless be considered by them.
Changes to UK VAT legislation as a result of Brexit
Changes applicable directly to VAT
As mentioned above, the vast majority of UK VAT legislation takes the form of EU-derived domestic legislation. As a result, the main changes to UK VAT legislation on exit day, made by the Taxation (Cross-border Trade) Act 2018 ('T(CT)A') will be those directly consequential on the UK leaving the EU, namely5:
- the abolition of acquisition VAT and its replacement with import VAT, and the consequential introduction of postponed accounting for import VAT
- the replacement of 'acquisitions' and 'supplies for acquisitions' with 'imports' and 'exports'
- the removal of the registration provisions in respect of distance selling and acquisitions
- the withdrawal of the Union and non-Union schemes for cross-border supplies of electronic services
- certain changes to warehousing regimes
- the removal of references to EU legislation
- the amendment of the place of supply rules such that EU member states are treated as third countries
One further change is the introduction of VATA 1994, Sch 8, Group 19. This is the first example of UK VAT legislation diverging from EU VAT legislation post-Brexit. It changes the liability of women's sanitary products from reduced-rated to zero-rated with effect from 'the earliest date that may be appointed consistently with the United Kingdom's EU obligations6' (ie exit day). UK VAT legislation may, however, start to diverge further from EU VAT legislation over a period of time.
The (comparatively minor) elements of VAT legislation which take the form of directly effective EU legislation, and which would consequently be regarded as retained EU law, are excluded from being treated as such by T(CT)A 2018, s 42. For the most part this means that the mutual assistance arrangements in place between the UK and the rest of the EU cease to apply unless separate arrangements are brought in to replace them. It also means that the VAT Information Exchange System, or VIES ceases to be available to UK businesses and is to be replaced by a domestic version.
One element of direct EU legislation remains to be treated as retained EU law is the 'implementing VAT regulation', ie Council Implementing Regulation (EU) No 282/2011 (see above). T(CT)A 2018, s 42(5) states that where Directive 2006/112/EC remains relevant for determining the meaning and effect of VAT law, that directive is to be read for that purpose in the light of the provision made by the implementing VAT regulation but ignoring such of its provisions as are excluded by regulations.
Changes applicable to customs legislation which also apply to VAT
As discussed earlier, EU customs legislation is directly effective and therefore would become retained EU law under EU(W)A 2018, s 3 were it not for T(CT)A 2018. This Act effectively sets out a UK customs regime (subject to secondary implementing legislation, much of which has been drafted but will not come into force until exit day) which replaces the EU customs legislation. Consequently, that EU customs legislation is excluded from being treated as retained EU law by virtue of T(CT)A 2018, s 29 and Sch 7. This change has implications for VAT as a result of the application of customs law to VAT by virtue of VATA 1994, s 16. The changes made, or to be made, by T(CT)A 2018 are beyond the scope of this section but will be covered by the appropriate divisions (primarily Division V3.3 (imports) and Division V4.3 (exports)).
- '1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.'
- A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.
- The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.
- For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it. A qualified majority shall be defined in accordance with Article 238(3)(b) of the Treaty on the Functioning of the European Union.
- If a State which has withdrawn from the Union asks to rejoin, its request shall be subject to the procedure referred to in Article 49.'
2. For direct effect, see V1.235.
3. 'There are estimated to be over 12,000 EU regulations to be adapted into UK law, some of which will require corrections to ensure there are no deficiencies in domestic legislation upon our exit from the EU'; Commons Library Briefing Paper, European Union (Withdrawal) Bill, 17/8079, 1 September 2017, p. 9
4. ie Directive 2006/112/EC (formerly Directive 77/388; formerly the first and second Council Directives of 11 April 1967).
5. T(CT)A 2018, ss 41, 43, Sch 8.
6. FA 2016, s 126.
This article was originally published in De Voil Indirect Tax Service, available through TolleyLibrary.
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