The European Union (Withdrawal) Act gateway
Until 31 December 2020, UK VAT analysis had to start or finish with the Principal VAT Directive 2006/112 ("PVD"). EU law was supreme. From 1 January 2021 there is a different legal gateway for EU rules to come into UK law. The new gateway in the European Union (Withdrawal) Act 2018 ("EUWA") is narrower than the old gateway in the European Communities Act 1972. There are special rules for directives, and even rules specific to the PVD. Only some EU law - frozen at the end of 2020 - remains supreme, and only in relation to some UK VAT legislation. HM Government has admitted that issues of this sort may only be resolved with litigation.
Section 4(1) EUWA provides that any of a list of effects (which we call here an "effect" or "proposition") of EU law which formed part of UK law on 31 December 2020, continued to do so on 1 January 2021. In principle all existing EU law propositions passed through that gateway (other than ones derived from EU Regulations and other similar rules which had their own separate gateway). Under section 5 EUWA those EU law propositions override UK legislation in force on 31 December 2020, and also any subsequent amendments where that would be consistent with the intention of the amendment. But section 4(2) narrows the gateway where the proposition arises from a directive, such as the PVD. The only propositions which pass through are ones "of a kind recognised" by the CJEU by the end of 2020, or by a UK court or tribunal in litigation started before the end of 2020 (see paragraph 38 of Schedule 8 EUWA).
The meaning of "of a kind recognised"
Effects can be "recognised" in the ratio of the case, or in obiter statements, though statements in dissenting or minority judgments, or Advocate General opinions, do not appear to count. The scope of "of a kind" is far less clear. The words are general. They indicate that any proposition which is similar to one which has been recognised, or is properly seen as part of a "class" with one which has been recognised, passes through the gateway. This is even if the new proposition or its details aren't clarified until after December 2020. The "class" might be determined using tools like the eiusdem generis principle of UK statutory interpretation, where general words are limited to things “of the same kind” as specific examples given. This is a familiar concept in the direct tax world, for example, in the caselaw on the sweep-up charge to tax on miscellaneous income.
The Explanatory Notes and Parliamentary debates
The Explanatory Notes to the EUWA suggest something different. We say "suggest" because the specific paragraph of the Notes is short, ambiguous, intended to deal with all directives (not just the PVD), and not easy to reconcile with other paragraphs. It suggests that only very specific propositions already recognised pass through the gateway. Government statements in Parliamentary debates also take this view. This would make the gateway very narrow, and could even exclude any effect of a provision of the PVD which was so obvious that no litigation has been needed.
Our views
However, we think this interpretation is not correct, and the Courts should not uphold it. It seems to make the words "of a kind" redundant. It does not sit easily with the express confirmation in section 42 of the Taxation (Cross-border Trade) Act 2018 that the Halifax and Kittel doctrines pass through, or the way in which that section preserves some effect for the VAT Implementing Regulation 282/2011. In addition, Explanatory Notes of this specific sort are not a legitimate tool when interpreting UK legislation.
HMRC have sometimes relied on the PVD against taxpayers. It is more common that taxpayers choose to rely on it in order to support a filing position. Adequate analysis must be done to avoid an exposure to penalties.
We see a range of ways to interpret and apply the section 4(2) gateway. Its scope will be clarified as caselaw on it emerges. As the gateway applies to all EU law, it will not be in HMRC’s gift to issue guidance on it, except within parameters set initially by other Government departments, and later by the Courts. It is likely that much of the caselaw which clarifies the gateway will not be in a VAT context, but instead in the context of other directives. The interpretations we think should be considered at the moment, discussed in light of specific VAT examples, are the subject of a webinar on Friday, 26 March 2021.
One possibility is that practically the whole effect of the PVD can pass through the gateway if it "goes with the grain" of the relevant part of UK VAT legislation so that a "conforming interpretation" of the UK legislation is possible, but much less will pass through where it does not "go with the grain" and so the UK VAT legislation would have to be "disapplied".
But it is most likely that a context-specific assessment of how the EUWA applies will be needed each time a material question arises. That will be the case at least until the gateway is clarified, and possibly afterwards.
Finally
Other provisions of the EUWA, and the Taxation (Cross-border Trade) Act 2018, create related uncertainty. CJEU decisions given after December 2020 can be taken into account where EU law is still relevant, but are not binding. The Supreme Court, and the Court of Appeal, can decide not to follow pre-2021 CJEU decisions if they think it right to do so. In taking back control of our laws, the UK has created new and difficult UK law analysis wherever an EU directive applied prior to Brexit. That’s specifically the case for VAT.
Next steps
Join our webinar on Friday, 26 March 2021 or speak to one of the Hogan Lovells contacts listed above about the findings of our research and analysis in this area.
Authored by Rupert Shiers, Adam Parry, and Andrew Eaton
